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Valuation of the Debt-Tax Shield

Author

Listed:
  • Deen Kemsley

    (Columbia Business School)

  • Doron Nissim

    (Accounting, Business Law & Taxation)

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.

Suggested Citation

  • Deen Kemsley & Doron Nissim, 2001. "Valuation of the Debt-Tax Shield," Yale School of Management Working Papers ysm249, Yale School of Management.
    • Handle: RePEc:ysm:somwrk:ysm249
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    More about this item

    Keywords

    Capital Structure; Corporate Taxes; Personal Taxes; Debt-tax Shield;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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