On the Value and Determinants of the Interest Tax Shields

Abstract

We use a dynamic model of the rm to ascertain both the value and the determinants of the tax bene ts of debt. A standard parameterization suggests that the value of the interest tax shields represents around 3% of rm value, and it varies considerably across industries. In addition, our results show that this component of the stock price behaves countercyclically over the business cycle. Finally, besides the interest rate on debt and the corporate income tax rate, we nd that the curvature of the production function is one of the most important determinants of the tax advantage of debt.