Working Paper Series
Does the Debt Tax Shield Distort Ownership Efficiency?
(), Lars Persson
() and Joacim Tåg
Abstract: 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 are small and better financial
expertise reduces expected bankruptcy costs.
Keywords: Acquisitions; Capital Gains Tax; Corporate Tax; LBOs; Mergers and Acquisitions; Ownership; Private Equity; Tax Shields; (follow links to similar papers)
JEL-Codes: D20; G32; G33; G34; H25; H32; L19; L22; (follow links to similar papers)
17 pages, June 11, 2010, Revised September 22, 2017
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- This paper is forthcoming as:
Norbäck, Pehr-Johan, Lars Persson and Joacim Tåg, 'Does the Debt Tax Shield Distort Ownership Efficiency?', International Review of Economics and Finance.
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