Debt Tax Shields Around the OECD World

Augusto Castillo, Jorge Niño, Salvador Zurita

Research output: Contribution to journalArticlepeer-review

5 Scopus citations


Taxes affect a company’s optimal capital structure, value, and cost of capital, but their impact depends on the tax regime of the country where the company operates. The OECD classifies the tax regimes of its member countries in seven groups. In this paper we offer a general model that encompasses those seven groups. We show that tax benefits of debt vary significantly across tax systems, and that using either Modigliani and Miller’s (1963) or Miller’s (1977) formulas in other tax regimes can lead to quantitatively important mistakes. We also find a significantly positive relationship between average leverage in OECD countries and our indicator of tax shields.

Original languageEnglish
Pages (from-to)26-43
Number of pages18
JournalEmerging Markets Finance and Trade
Issue number1
StatePublished - 2 Jan 2017
Externally publishedYes


  • G32
  • capital structure
  • cost of capital
  • debt and taxes
  • valuation of companiesJEL: G30


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