We study the aggregate and distributional capital dynamics in a heterogeneous-firm investment model with idiosyncratic productivity shocks, financial frictions, tax policies, and capital durability as measured by depreciation rates. The model shows that financially constrained firms prefer less durable capital because it receives smaller immediate tax deductions. This interaction between tax policy and financial frictions distorts the allocation of capital durability. We validate these mechanisms using U.S. microdata and policy variation, including anti-recharacterization laws and bonus depreciation provisions. Empirically, constrained firms invest disproportionately in less durable capital, resulting in significant misallocation that amplifies and prolongs the effects of financial recessions. Finally, we show that targeted tax policies, such as accelerated depreciation for durable capital, can ease financial distortions and support faster recovery from downturns.

Spyridon Gkikopoulos is an Assistant Professor of Accounting at Alliance Manchester Business School. His research examines how taxes interact with real and capital market frictions to shape firms’ investment decisions, with a particular focus on corporate risk, investment, and innovation. His work has been published in Management Science and presented at leading international conferences and seminars. He holds a PhD in Accounting and Finance from Alliance Manchester Business School and maintains active research interests at the intersection of corporate taxation, public finance, and corporate behavior