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On the value and determinants of the interest tax shields

Amilcar A. Menichini ()
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Amilcar A. Menichini: Naval Postgraduate School

Review of Quantitative Finance and Accounting, 2017, vol. 48, issue 3, 725-748

Abstract: Abstract We use a dynamic model of the firm to ascertain both the value and the determinants of the debt tax shields. For a representative U.S. firm, we find that the value of the interest tax shields represents less than 5 % of firm value, and it varies considerably across U.S. industries. Our results also show that this component of firm value behaves counter-cyclically over the business cycle. Finally, besides the interest rate on debt and the corporate income tax rate, we find that the curvature of the production function is one of the main determinants of the tax advantage of debt.

Keywords: Interest tax shields; Dividend discount model; Gordon growth model; Dynamic programming (search for similar items in EconPapers)
JEL-codes: G31 G32 (search for similar items in EconPapers)
Date: 2017
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