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The purpose of this paper is to show that distinguishing between gross and net tax shields arising from interest deductions is important to firm valuation. The distinction affects the interpretation but not valuation of tax shields for the famous Miller’s (1977) model with corporate and personal taxes. However, for the well-known Miles and Ezzell’s (1985) model, the authors show that the valuation of tax shields can be materially affected. Implications to the cost of equity and optimal capital structure are discussed.

This paper proposed a simple tax shield clarification that distinguishes between gross and net tax shields. Net tax shields equal gross tax shields minus personal taxes on debt. When an after-tax riskless rate is used to discount shareholders’ tax shields, this distinction affects the interpretation but not valuation results of the Miller’s model. However, when the after-tax unlevered equity rate is used to discount tax shields under the well-known Miles and Ezzell’s (1985) model, the difference between gross and net tax shields can materially affect valuation results. According to the traditional ME model, both gross tax shields and debt interest tax payments (i.e. net tax shields) are discounted at the after-tax unlevered equity rate. By contrast, the proposed revised ME model discounts gross tax shields at the unlevered equity rate but personal taxes on debt income at the riskless rate (like debt payments). Because personal taxes on debt are nontrivial, traditional ME valuation results can noticeably differ from the revised ME model to the extent that after-tax unlevered equity and debt rates differ from one another.

For comparative purposes, the authors provide numerical examples of the traditional and revised ME models. The following constant tax rates and market discount rates are assumed: T_c=0.30, T_pb=0.20, T_ps=0.10, r=0.06, and ρ=0.10. Table I compares these two models’ valuation results. Maximum firm value for the traditional ME model is 7.89 compared to 7.00 for the revised ME model. At a 50 percent leverage ratio, equity value is reduced from 3.71 to 3.49, respectively. Importantly, the traditional ME model suggests that firm value linearly increases with leverage and implies an all-debt capital structure, whereas firm value stays relatively constant as leverage increases in the revised ME model. These capital structure differences arise due to discounting debt tax payments with the unlevered equity rate (riskless rate) in the traditional ME (revised ME) model. Figure 1 graphically summarizes these results by comparing the traditional ME model (thin lines) to the revised ME model (bold lines).

Textbook treatments of leverage gains to firms or projects with corporate and personal taxes should be amended to take into account this previously unrecognized tradeoff. Also, empirical analyses of capital structure are recommended on the sensitivity of leverage ratios to the gross-tax-gain/debt-personal taxes tradeoff.

Financial managers need to understand how to value interest tax shields on debt in making capital structure decisions, computing the cost of capital, and valuing the firm.

The valuation of interest tax shields in finance is a long-standing controversy. Nobel prize winners Modigliani and Miller (MM) wrote numerous papers on this subject and gained fame from their ideas in this area. However, application of their ideas has changed over time due to the Miles and Ezzell’s (ME) model of firm valuation. The present paper adapts the pathbreaking ideas of MM to the valuation framework of ME. Students and practitioners in finance can benefit by the valuation results in the paper.

No previous studies have recognized the valuation issues resolved in the paper on the application of the popular and contemporary ME model of firm valuation to the MM valuation concepts. The new arguments in the paper are easy to understand and readily applied to firm valuation.

The purpose of this paper is to establish whether inefficiency in a tax system and the likely difficulty in resolving tax matters can reduce the appeal for tax shield as incentive for debt financing, and by so doing exacerbate the cases of tax fraud.

A review approach/theoretical approach is adopted in the paper, where, in addition to reviewing literature on the relationship between tax incentives and corporate financing, the paper examines the structure of the Nigerian tax system, the gaps, and some pending tax cases involving foreign firms in Nigeria. Based on some theoretical judgments, efforts were made to link the rising cases of tax frauds to the dwindling appeal for tax shield as an incentive for the use of debt.

The study reveals that, as in the case of Nigeria, an environment of multiple tax system reduces incentives to pay tax or for voluntary compliance; that the exclusion of crucial non‐debt tax shelters such as depreciation, heightens pressure on the use of debt‐based tax shelters; and that controversies on deductibility make it difficult to distinguish between criminal and civil proceedings in tax cases.

The paper is only theoretical. The number of cases captured is very limited. However, the issue of tax frauds among corporate entities in the country remains very popular.

The paper is the first to examine the likelihood of an inefficient tax environment to reduce the appeal of tax shield as an incentive to debt financing.

The purpose of this paper is to empirically investigate the factors deriving effective tax rate (ETR) for Indian manufacturing firms in different sectors. The study also tries to analyze the sensitiveness of ETR because of shocks on its key determinants.

The study is using Arellano–Bond dynamic panel regression model to identify the key drivers of ETR, and impulse response functions of panel vector auto-regression model to analyze the response of ETR because of one standard deviation (SD) shock to its key determinants.

This study concludes that ETR is significantly explained by firm size, profitability, growth rate and non-debt tax shield in most of the sectors, and debt ratio, asset tangibility and age of the firms are impacting ETR differently across sectors. In case of entire manufacturing sector, firm size, profitability, growth and non-debt tax shield are driving ETR positively and asset tangibility is driving ETR negatively. Interest coverage ratio (ICR) and firm age are not significant drivers of ETR. ETR is positively related with firm size, but responses negatively when there is an immediate shock to firm size. Similarly, ETR is negatively related with asset tangibility, but responds positively following an immediate shock to it. Overall, ETR is more sensitive and responses significantly because of shocks in firm size, profitability, growth, asset tangibility and non-debt tax shield whereas, the response is very marginal following shocks to debt ratio, ICR and age of the firm.

Firm managers may find the study useful to understand the receptiveness of ETRs at each sector level. The empirical findings are not only validating the theoretical developments but also providing a root cause analysis to the firm managers to understand the cause and consequence of ETRs for firms at different sectors.

Empirically investigating the factors driving ETR and analyzing its sensitiveness because of one SD shock on its key determinants for Indian manufacturing firms from different sectors is the originality of this study. Developing a strong theoretical background and empirically validating it through advanced methodology makes the study unique.

The purpose of this paper is to examine the determinants of capital structure using a dataset of firms in Malaysia.

This paper carries out a panel data analysis of 8,270 observations from 827 listed non-financial firms on the Malaysia stock market over the period 2008–2017. To estimate the model and analyse the data collected from the DataStream and World Bank databases, the authors use static panel estimation techniques as well as two-step difference and system dynamic GMM estimator.

The results show that profitability, growth opportunity, tax-shield, liquidity and cash flow volatility have a negative and significant impact on debt measures. However, the effects of collateral, non-debt tax and earnings volatility on measures of debt are positive and significant. In addition, firm size, firm age, inflation rate and interest rate are important determinants of the present value of debt. The results also show a significant inverse U-shaped relationship between the firm's age and its capital structure. In general, the results support the proposition advocated by the pecking order and trade-off theories.

The results of this study necessitate formulation of various policy measures that can counter the effects of debt on firms.

The present study is among the earliest to use both the book and market value measures of capital structure. It also uses three proxies for each: total debt, long-term debt and short-term debt. It incorporates earning volatility and cash flow volatility as new independent variables in the model. These variables have not previously been used together with both book and market value measures of capital structure. The study also examines the non-monotonic relationship between firm's age and capital structure using a quadratic regression method. It applies both static panel techniques and dynamic GMM estimation techniques to analyse the data.

Capital structure is vital to every company because it has a huge impact on the company’s financial decisions. The ultimate goal of the company is to effectively mix the debt-to-equity ratio (DER) to maximize the shareholder value. When the Covid-19 pandemic was officially announced in early March 2020, widespread negative effects started to affect almost all industries in Indonesia. The hotel, restaurant, and tourism industry is considered to be one of the most severely affected industry categories. It is important to pay attention to the role of this industry in Indonesia’s overall economy as it contributes to Indonesia’s gross domestic product at 6.1% in 2019. The objective of this study was to address the effects on the formation of capital structure of firm-specific characteristics among a sample of 26 active hotels, restaurants, and tourism companies listed on the Indonesia Stock Exchange. The authors used the data from the second and third quarters of 2019 to represent the period before the pandemic. Meanwhile, the period during the pandemic is represented by the data from the second and third quarters of 2020. Using the random-effects model to test the hypotheses, the authors found that asset tangibility, tax shield, and earnings volatility had significant positive correlations with book leverage. Furthermore, tax shield and earnings volatility had significantly positive relationships with DER. The authors also detected that size and earnings volatility had significant negative correlations with net equity. However, the authors found no significant relationship between capital structure and the pandemic dummy. It was inferred from the results that the pandemic had no effect on capital structure within the research period.

This paper employs choice‐theoretic models to study the impact of the 1986 Tax Reform Act on firms' issue behavior and the determinants of corporate capital structures. Choice‐theoretic models allow researchers to examine firms' leverage decisions at the margin. Both parametric and semi‐parametric estimations are employed to perform a more precise statistical inference. The results show that firms tend to issue more debt after the 1986 Tax Reform Act. The results also support the theories based on the trade‐off between tax shields and financial distress costs, corporate non‐debt tax shields, and agency costs inclusive of those from free cash flows.

The purpose of this paper is to identify possible tax synergies from acquisitions when the acquiring firm gains a non‐debt tax shield (NDTS) not directly associated with its own past performance, or a windfall NDTS. One possible benefit of a windfall NDTS is reduced reliance on interest tax shields to lower the firm's marginal tax rate (MTR).

This paper tests the likelihood of issuing debt following acquisitions of windfall non‐debt tax attributes with logistic regressions. Both acquirers and targets are publicly held US firms. Acquisitions are completed from 1987 to 2003, and debt issues are observed following the deal. Target firm tax attributes are defined as the total tax spread, tax loss carryforward (TLCF), and the MTR.

Target firm tax spread and TLCFs are inconsequential to the acquirer's likelihood of issuing future debt, suggesting that tax synergies are relatively unimportant motives for acquisitions. As predicted, the target firm MTR is not significant to acquirer debt issues.

This paper makes several contributions. First, the notion of tax synergies from acquisitions is unresolved. This paper continues the search for tax synergies in acquisitions by examining the importance of acquired NDTS in the post‐acquisition period. Second, this paper examines the influence of NDTS on debt issuance in a post‐event framework. Third, this paper provides additional evidence that corporate managers have leverage targets.

Explains that three approaches to valuation under leverage are found in the financial economics literature: weighted average cost of capital (WACC); flow‐to‐equity (FTE) or residual equity income (REI); and adjusted present value (APV). Although both the WACC and the FTE methods have been extensively used in real estate investment analyses, it appears that the APV has received little attention in the real estate literature. This is surprising because the reasons that render the APV preferable to the other two methods exist in most real investment situations. Provides an introduction to the APV method and illustrates it with a numerical example. Discusses potential applications of this method in different real estate investment problems.

The aim of this empirical study is to explore the factors that affect the capital structure of manufacturing firms and to investigate whether the capital structure models derived from Western settings provide convincing explanations for capital structure decisions of the Pakistani firms.

Different conditional theories of capital structure are reviewed (the trade‐off theory, pecking order theory, agency theory, and theory of free cash flow) in order to formulate testable propositions concerning the determinants of capital structure of the manufacturing firms. The investigation is performed using panel data procedures for a sample of 160 firms listed on the Karachi Stock Exchange during 2003‐2007.

The results suggest that profitability, liquidity, earnings volatility, and tangibility (asset structure) are related negatively to the debt ratio, whereas firm size is positively linked to the debt ratio. Non‐debt tax shields and growth opportunities do not appear to be significantly related to the debt ratio. The findings of this study are consistent with the predictions of the trade‐off theory, pecking order theory, and agency theory which shows that capital structure models derived from Western settings does provide some help in understanding the financing behavior of firms in Pakistan.

This study has laid some groundwork to explore the determinants of capital structure of Pakistani firms upon which a more detailed evaluation could be based. Furthermore, empirical findings should help corporate managers to make optimal capital structure decisions.

To the authors' knowledge, this is the first study that explores the determinants of capital structure of manufacturing firms in Pakistan by employing the most recent data. Moreover, this study somehow goes to confirm that same factors affect the capital structure decisions of firms in developing countries as identified for firms in developed economies.

Considerable debate centres around the use of debt finance as opposed to new equity and internally generated funds for the financing of new investment projects. The favourable corporate tax treatment of debt interest payments compared to equity returns appears to be a government incentive to debt finance. In addition, the differential tax treatment of financial institutions' income and individual investors' income under the tax code, all leads to the idea, that debt financing may increase the market value of a firm beyond the expected value of its operational cash flows.