The potentially important impact of taxation on corporate financing decisions is widely recognized despite the fact that the empirical evidence is far from conclusive. In this study, we assess the debt tax benefits of Spanish listed firms throughout the period 2007-2013. Specifically, using a simulation approach, we found the capitalized value of gross interest deductions amounts to approximately 6.4% of firms’ market value, while the net debt benefit (of personal taxes) is estimated at 2.1%, in contrast to the traditional 11.4% (i.e. marginal tax rate times debt). Conversely, the panel data regression approach reveals a 13.6% (34.2%) debt tax shield in terms of firm (debt) value. This evidence supports the view that taxes influence corporate decision-making and that debt makes a reasonable contribution to firm value.
