Risky Tax Shields and Risky Debt: An Exploratory Study

Abstract This paper identifies three sources of risk for tax shields (TS): two of them associated with debt risk and one associated to operating risk. A set of conditions for defining risky debt associated to cash flow and not to accounting earnings is presented. The paper shows that realization of tax shields for finite cash flows in any period of time t are correlated with Earnings before Interest and Taxes…