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On the value and determinants of the interest tax shields

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  • Amilcar A. Menichini

    (Naval Postgraduate School)

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.

Suggested Citation

  • Amilcar A. Menichini, 2017. "On the value and determinants of the interest tax shields," Review of Quantitative Finance and Accounting, Springer, vol. 48(3), pages 725-748, April.
    • Handle: RePEc:kap:rqfnac:v:48:y:2017:i:3:d:10.1007_s11156-016-0566-0
    DOI: 10.1007/s11156-016-0566-0
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    Cited by:

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    2. Guanming He & Helen Mengbing Ren & Richard Taffler, 2020. "The impact of corporate tax avoidance on analyst coverage and forecasts," Review of Quantitative Finance and Accounting, Springer, vol. 54(2), pages 447-477, February.

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    More about this item

    Keywords

    Interest tax shields; Dividend discount model; Gordon growth model; Dynamic programming;
    All these keywords.

    JEL classification:

    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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