Have the Tax Benefits of Debt Been Overestimated?

56 Pages Posted: 5 Apr 2008 Last revised: 15 Nov 2011

See all articles by Jennifer Blouin

Jennifer Blouin

University of Pennsylvania - Accounting Department

John E. Core

Massachusetts Institute of Technology (MIT) - Sloan School of Management

Wayne R. Guay

University of Pennsylvania - Accounting Department

Date Written: April 22, 2010

Abstract

We re-examine the claim that many corporations are underleveraged in that they fail to take full advantage of debt tax shields. We show prior results suggesting underleverage stems from biased estimates of tax benefits from interest deductions. We develop improved estimates of marginal tax rates using a non-parametric procedure that produces more accurate estimates of the distribution of future taxable income. We show that additional debt would provide firms with much smaller tax benefits than previously thought, and when expected distress costs and difficult-to-measure non-debt tax shields are also considered, it appears plausible that most firms have tax-efficient capital structures.

Keywords: capital structure, debt, marginal tax rates, corporate taxes

JEL Classification: H20, M41, G31, G32

Suggested Citation

Blouin, Jennifer and Core, John E. and Guay, Wayne R., Have the Tax Benefits of Debt Been Overestimated? (April 22, 2010). Available at SSRN: https://ssrn.com/abstract=1116779 or http://dx.doi.org/10.2139/ssrn.1116779

Jennifer Blouin

University of Pennsylvania - Accounting Department ( email )

1315 SHDH
3620 Locust Walk
Philadelphia, PA 19104-6365
United States
215-898-1266 (Phone)

John E. Core (Contact Author)

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

100 Main Street
E62-416
Cambridge, MA 02138
United States

Wayne R. Guay

University of Pennsylvania - Accounting Department ( email )

3641 Locust Walk
1329 Steinberg-Dietrich Hall
Philadelphia, PA 19104-6365
United States
215-898-7775 (Phone)
215-573-2054 (Fax)

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
1,585
Abstract Views
5,805
rank
12,335
PlumX Metrics