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Panteghini, Paolo
Vergalli, Sergio
Year of Publication: 
Series/Report no.: 
CESifo Working Paper 5713
In this article we focus on a representative firm that can decide when to invest under default risk. On the one hand, this firm can benefit from generous tax depreciation allowances, on the other hand it faces a default risk. Our aim is to study the effects of tax depreciation allowances in a risky environment. As will be shown in our numerical analysis, generous tax depreciation allowances lead to a decrease in a firm’s leverage and, in most cases, cause a reduction in default risk. This result has a strong policy implication, in that it shows that an investment stimulus pack is expected neither to increase the default risk nor to cause financial instability.
capital structure
contingent claims
corporate taxation and hybrid securities
Document Type: 
Working Paper

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