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Valuation of the Debt Tax Shield
Article first published online: 17 DEC 2002
DOI: 10.1111/0022-1082.00488
The American Finance Association 2002
1540-6261/asset/cover.gif?v=1&s=5192ce61b1e4bde927ebc2df55b44b4da55ef137 "The Journal of Finance")
Additional Information
How to Cite
Kemsley, D. and Nissim, D. (2002), Valuation of the Debt Tax Shield. The Journal of Finance, 57: 2045–2073. doi: 10.1111/0022-1082.00488
Publication History
- Issue published online: 17 DEC 2002
- Article first published online: 17 DEC 2002
- Abstract
- Cited By
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.