Working Paper: NBER ID: w2537
Authors: Andrew B. Lyon
Abstract: A change in the tax law that increases investment incentives for new assets may result in excess returns on new investment, causing firm value to increase. Alternatively, because the investment incentives apply only to new investments, the value of existing assets that compete with these investments may decline. A model is developed in this paper which shows that in general investment incentives have a theoretically ambiguous effect on firm value. Models proposed by Abel (1982), Auerbach and Kotlikoff (1983), and Feldstein (1981) are shown to be special cases of this more general model. Empirical tests examine the changes in firm value to repeated changes of the investment tax credit. Cross-sectional teats find the changes in firm value are positively related to the expected receipt of investment tax credits. No evidence is found to support a relationship between expected changes in the value of a firm's existing assets and changes in firm value.
Keywords: investment tax credit; firm value; tax policy
JEL Codes: H25; G31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Existing Assets (G31) | Firm Value (G32) |
| Investment Tax Credit (ITC) (H25) | Existing Assets (G31) |
| Investment Tax Credit (ITC) (H25) | Firm Value (G32) |
| New Investments (G31) | Firm Value (G32) |
| Changes in ITC (O39) | Changes in Firm Value (G32) |
| ITC Benefits (H20) | Firm Value (G32) |