Working Paper No. 841

Does the Debt Tax Shield Distort Ownership Efficiency?

Published: June 11, 2010, revised May 2011 and September 2017Pages: 17Keywords: Acquisitions; Capital Gains Tax; Corporate Tax; LBOs; M&As; Ownership; Private Equity; Tax ShieldsJEL-codes: D20; G32; G33; G34; H25; H32; L19; L22

Does the Debt Tax Shield Distort Ownership Efficiency? Pehr-Johan Norbäck, Lars Persson and Joacim Tåg


The tax laws of most developed countries are debt biased since firms can deduct interest on debt but not on equity. This bias is known to distort investment decisions. However, less is known about how the debt tax shield affects the ownership of assets when bidders differ financial expertise and thus in optimal use of leverage. We show that the debt tax shield need not always distort ownership efficiency. Assets end up with the socially preferred owner when differences in financial and productive expertise between bidders is small and better financial expertise reduces expected bankruptcy costs.

Pehr-Johan Norbäck

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Lars Persson

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Ph: +46 8 665 4504
lars.persson@ifn.se

Joacim Tåg

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Ph: +46 8 665 4524
joacim.tag@ifn.se

Interdisciplinary European Studies

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This book explores the complex and ever-changing relationship between the European Union and its member states. The recent surge in tension in this relationship has been prompted by the actions of some member state governments as they question fundamental EU values and principles and refuse to implement common decisions seemingly on the basis of narrowly defined national interests.

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