Gross and Net Tax Shield Valuation

19 Pages Posted: 20 Dec 2017 Last revised: 10 Jan 2019

See all articles by James W. Kolari

James W. Kolari

Texas A&M University - Department of Finance

Date Written: December 15, 2017


This paper shows 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 (1977) model with corporate and personal taxes. However, for the well-known Miles and Ezzell (1985) model, we show that the valuation of tax shields can be materially affected. Implications to the cost of equity and optimal capital structure are discussed.

Keywords: Tax Shields, Share Valuation, Firm Valuation, Capital Structure

JEL Classification: G12, G31, G32

Suggested Citation

Kolari, James W., Gross and Net Tax Shield Valuation (December 15, 2017). Available at SSRN: or

James W. Kolari (Contact Author)

Texas A&M University - Department of Finance ( email )

Department of Finance
College Station, TX TX 77843-4218
United States
979-845-4803 (Phone)
979-845-3884 (Fax)

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