Valuation of the Debt Tax Shield


  • Deen Kemsley,

  • Doron Nissim

    Search for more papers by this author
    • Kemsley is with Columbia Business School and Yale School of Management. Nissim is with Columbia Business School. We express our appreciation for helpful comments from the editor; an anonymous referee; and seminar participants at the Columbia University Burton Conference, Cornell University, Harvard University, Hebrew University at Jerusalem, Massachusetts Institute of Technology, Stanford University, Tel Aviv University, UCLA, University of California at Berkeley, University of North Carolina at Chapel Hill, and Yale University. We also express appreciation for financial assistance from the Columbia Business School Research Program in Tax, and we thank John Graham for providing us with firm-level tax rate information.


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 (10 percent) of debt balances (firm value), net of the personal tax disadvantage of debt.