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Tax shield, bankruptcy and interest ceiling

  • This paper analyses the tax shield under realistic assumptions: no immediate refund and potential corporate bankruptcy for different financing policies. Assuming a German setting, we additionally iestigate the impact of the interest ceiling (“Zinsschranke”) introduced by the German Tax Reform Act 2008 on the tax shield value. Our analysis rests on an option pricing model in a single period setting and on a Monte Carlo Simulation model in a multiperiod setting. We find the introduction of possible bankruptcy to have a significant impact on the tax shield; in contrast the effect of the interest ceiling is negligible.

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Document Type:Working Paper
Author:Christian Arnold, Alexander LahmannORCiD, Bernhard SchwetzlerORCiD
Chairs and Professorships:Chair of Financial Management
Year of Completion:2011
Available at SSRN (Social Science Research Network), for the link see below