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The firm-specific nature of debt tax shields and optimal corporate investment decisions

Author

Listed:
  • Assaf Eisdorfer
  • Thomas J. O'Brien

Abstract

Purpose - While an operation's unlevered value is objective, the value of the debt tax shield is subjective since it depends on the capital structure policy of the firm that owns the operation. The purpose of this paper is to explore the implications of this subjective nature of debt tax shield value for corporate investment decisions. Design/methodology/approach - The study develops a simple theoretical model. Findings - The paper shows that even a low probability of selling a project in the future to a firm with a different tax shield value can significantly affect a project's weighted average cost of capital (WACC) and total value. Practical implications - Managers should be aware of this issue when making corporate investment decisions. Originality/value - This is the first study to address the implication of the subjective nature of debt tax shield value.

Suggested Citation

  • Assaf Eisdorfer & Thomas J. O'Brien, 2012. "The firm-specific nature of debt tax shields and optimal corporate investment decisions," Managerial Finance, Emerald Group Publishing, vol. 38(6), pages 560-570, May.
  • Handle: RePEc:eme:mfipps:v:38:y:2012:i:6:p:560-570
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    References listed on IDEAS

    as
    1. Qi, Howard, 2011. "Value and capacity of tax shields: An analysis of the slicing approach," Journal of Banking & Finance, Elsevier, vol. 35(1), pages 166-173, January.
    2. Cooper, Ian A. & Nyborg, Kjell G., 2006. "The value of tax shields IS equal to the present value of tax shields," Journal of Financial Economics, Elsevier, vol. 81(1), pages 215-225, July.
    3. Enrique R. Arzac & Lawrence R. Glosten, 2005. "A Reconsideration of Tax Shield Valuation," European Financial Management, European Financial Management Association, vol. 11(4), pages 453-461, September.
    4. Ian A. Cooper & Kjell G. Nyborg, 2008. "Tax‐Adjusted Discount Rates with Investor Taxes and Risky Debt," Financial Management, Financial Management Association International, vol. 37(2), pages 365-379, June.
    5. Ian Cooper & Kjell G. Nyborg, 2007. "Valuing the Debt Tax Shield," Journal of Applied Corporate Finance, Morgan Stanley, vol. 19(2), pages 50-59, March.
    6. Amy Dittmar, 2004. "Capital Structure in Corporate Spin-Offs," The Journal of Business, University of Chicago Press, vol. 77(1), pages 9-44, January.
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    Citations

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    Cited by:

    1. Lucie Rudolfová, 2018. "The dependence of the costs of borrowed interest-bearing capital on the chosen financial variables [Závislost nákladů úročeného cizího kapitálu na vybraných finančních ukazatelích]," Český finanční a účetní časopis, University of Economics, Prague, vol. 2018(4), pages 51-69.

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