The recent interest in the valuation of tax benefits from debt arises from the disagreement in the existing literature about the meaning of “value of tax shields.” Although it is accepted that the value of a firm increases as effect of the tax deductibility of interest, the correct valuation of this extra-value is controversial. In this paper we adopt a risk-neutral approach to derive a general...

In this paper the performance of a sample of German companies is measured by comparing the initially invested capital adjusted for cost of capital, dividends paid, share repurchases and equity raised with the market value at the end of the holding period. All possible holding periods between 1987 and 2000 are covered. The sample is subdivided into companies listed in the DAX-, MDAXand SMAX-inde...

In this paper the performance of a sample of German companies is measured by comparing the initially invested capital adjusted for cost of capital, dividends paid, share repurchases and equity raised with the market value at the end of the holding period. All possible holding periods between 1987 and 2000 are covered. The sample is subdivided into companies listed in the DAX-, MDAXand SMAX-inde...

Debt Policy, Corporate Taxes, and Discount Rates This paper studies the valuation of assets with debt tax shields when debt policy is a general time-dependent function of the asset’s unlevered cash flows, value, and history. In a continuous-time setting, it shows that the value of a project’s debt tax shield satisfies a partial differential equation, which simplifies to an easily solved ordinar...

This paper investigates the effect of horizontal corporate group (keiretsu) affiliation on effective tax rates in Japan. After controlling for variables that affect corporate income taxes, keiretsu firms have lower effective tax rates than independent firms. These findings are attributed to political power and the unique corporate governance mechanism of keiretsu groups. Furthermore, horizontal...

Fernandez (2004b) argues that the present value effect of the tax saving on debt cannot be calculated as simply the present value of the tax shields associated with interest. This contradicts standard results in the literature. It implies that, even though the capital market is complete, value-additivity is violated. As a consequence, adjusted present value formulae of a standard sort cannot be...

A structural econometric investigation of the agency theory of financial structure We estimate a structural model of financing choices in presence of managerial moral hazard, financial distress costs and taxes. In the theoretical model, firms with low cost of managerial effort, and high financial distress costs and non–debt tax shields, find it optimal to issue equity. Correspondingly the likel...

n 1958, Nobel Laureates Franco Modigliani and Merton Miller published their famous irrelevance theorems.1 One implication from these theorems is that ers and the U.S. government. Panel A of Figure 1 shows that if the corporate tax rate is 33.3%, the government gets one-third of the pie for an all-equity firm, and stockholders get the remaining two-thirds. But if the firm chooses to finance with...

In contrast to the standard capital structure theory prediction that builds on a trade-o¤ between interest tax shields and expected bankruptcy costs, public …rms use debt quite conservatively. To address this well known debt conservatism puzzle (Graham 2000), I argue that servicing debt drains valuable liquidity for a …nancially constrained …rm and hence endogenously creates ‘debt servicing cos...

Abstract We examine how creditor rights affect the trade-off between non-debt and debt tax shields. Using four bankruptcy reforms a panel of private public firms from Italy, we show that laws empowering creditors reduce avoidance increase financing, consistent with substituting shields corroborate validity our findings using across 33 countries. Additionally, document impact protection is mitig...