(2018) Clemente-Almendros, José A.; Sogorb-Mira, Francisco
In spite of the fact that there is empirical evidence that debt tax benefits add to firm value, additional
research is needed to explain the apparently conservative debt policy of many firms. This study exam-
ines whether the costs of debt and non-debt tax related issues might shed some light on the apparent
“conservative leverage puzzle” for Spanish listed firms throughout the period 2007–2013. Specifically,
we compare the costs of financial distress with the potential tax benefits of debt. In addition, we test
whether debt conservativeness, measured by the kink, is explained by different costs of debt and non-
debt tax shields. Our findings suggest that the most conservative Spanish listed firms may not be acting
sub-optimally with respect to the tax advantage of debt financing. Furthermore, the results obtained are
consistent with the belief that debt costs might offset the tax benefits stemming from debt financing, and
debt and non-debt tax shields could act as substitutes