The cost of debt
Journal Article (Journal Article)
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. © 2010 the American Finance Association.
Full Text
Duke Authors
Cited Authors
- Van Binsbergen, JH; Graham, JR; Yang, J
Published Date
- December 1, 2010
Published In
Volume / Issue
- 65 / 6
Start / End Page
- 2089 - 2136
Electronic International Standard Serial Number (EISSN)
- 1540-6261
International Standard Serial Number (ISSN)
- 0022-1082
Digital Object Identifier (DOI)
- 10.1111/j.1540-6261.2010.01611.x
Citation Source
- Scopus