Valuation of the Debt-Tax Shield

Deen Kemsley () and Doron Nissim ()
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Deen Kemsley: Columbia Business School
Doron Nissim: Accounting, Business Law & Taxation

Yale School of Management Working Papers from Yale School of Management

Abstract: In this study, we use cross-sectional regressions to estimate the value of the debt-tax shield. Recognizing that debt is correlated with the value of operations along nontax dimensions, we estimate reverse regressions in which we regress future profitability on firm value and debt rather than regressing firm value on debt and profitability. Reversing the regressions mitigates bias and facilitates the use of market information to control for differences in risk and expected growth. Our estimated value for the debt-tax shield is approximately 40 percent (ten percent) of debt balances (firm value), net of the personal tax disadvantage of debt. In addition, our estimates for the debt-tax shield vary across tax regimes and across firms in a predictable manner.

Keywords: Capital Structure; Corporate Taxes; Personal Taxes; Debt-tax Shield (search for similar items in EconPapers)
JEL-codes: G12 G32 H24 H25 (search for similar items in EconPapers)
Date: 2001-12-04
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Persistent link: https://EconPapers.repec.org/RePEc:ysm:somwrk:ysm249

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