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The Cost of Debt
Author(s) -
Van BINSBERGEN JULES H.,
GRAHAM JOHN R.,
YANG JIE
Publication year - 2010
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/j.1540-6261.2010.01611.x
Subject(s) - debt , collateral , economics , weighted average cost of capital , asset (computer security) , debt ratio , value (mathematics) , monetary economics , cost of capital , econometrics , microeconomics , financial economics , finance , mathematics , statistics , computer science , computer security , financial capital , profit (economics) , individual capital
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.