Finance Papers

Document Type

Journal Article

Date of this Version

2010

Publication Source

The Journal of Finance

Volume

65

Issue

6

Start Page

2089

Last Page

2136

DOI

10.1111/j.1540-6261.2010.01611.x

Abstract

We use exogenous variation in tax benefit functions to estimate firm-specific cost of debt functions that are conditional on company characteristics such as collateral, size, and book-to-market. By integrating the area between the benefit and cost functions, we estimate that the equilibrium net benefit of debt is 3.5% of asset value, resulting from an estimated gross benefit (cost) of debt equal to 10.4% (6.9%) of asset value. We find that the cost of being overlevered is asymmetrically higher than the cost of being underlevered and that expected default costs constitute only half of the total ex ante costs of debt.

Copyright/Permission Statement

This is the peer reviewed version of the following article, which has been published in final form at http://dx.doi.org/10.1111/j.1540-6261.2010.01611.x. This article may be used for non-commercial purposes in accordance with Wiley Terms and Conditions for Self-Archiving.

Comments

At the time of publication, author Jules van Binsbergen was affiliated with Northwestern University and Stanford University. Currently, he is a faculty member at the Wharton School at the University of Pennsylvania.

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Date Posted: 27 November 2017

This document has been peer reviewed.