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How does the structure of an interest expense cap change the tax benefits of debt?

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  • Bhanot, Karan
  • François, Pascal
  • Kadapakkam, Palani-Rajan

Abstract

Using an earnings-based structural model, calibrated with US data for the period 2001–2017, we examine how the structure of an interest expense cap for the deduction of interest expense changes the tax benefits of debt. We find that an EBIT (EBITDA) based cap reduces the marginal tax benefits of debt by 6 percentage points (4.6 p.p.) of unlevered firm value for a typical firm. This impact differs across industries due to variations in industry-specific labor and physical capital deployed, and the associated depreciation. An EBITDA-based structure for a cap reduces the differential tax impact of a cap across industries. Our results are widely applicable in determining the cost of debt in the presence of these cap structures, enshrined in the US and OECD countries.

Suggested Citation

  • Bhanot, Karan & François, Pascal & Kadapakkam, Palani-Rajan, 2025. "How does the structure of an interest expense cap change the tax benefits of debt?," Journal of Corporate Finance, Elsevier, vol. 91(C).
    • Handle: RePEc:eee:corfin:v:91:y:2025:i:c:s092911992500015x
    DOI: 10.1016/j.jcorpfin.2025.102747
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    More about this item

    Keywords

    G1; G32; G33;
    All these keywords.

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation

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