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The Net Benefits to Leverage
Author(s) -
KORTEWEG ARTHUR
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.1540-6261.2010.01612.x
Subject(s) - leverage (statistics) , capital structure , debt to capital ratio , debt , equity (law) , valuation (finance) , business , panel data , market value , market timing , economics , econometrics , monetary economics , financial economics , finance , equity ratio , equity risk , mathematics , initial public offering , statistics , political science , law
I estimate the market's valuation of the net benefits to leverage using panel data from 1994 to 2004, identified from market values and betas of a company's debt and equity. The median firm captures net benefits of up to 5.5% of firm value. Small and profitable firms have high optimal leverage ratios, as predicted by theory, but in contrast to existing empirical evidence. Companies are on average slightly underlevered relative to the optimal leverage ratio at refinancing. This result is mainly due to zero leverage firms. I also look at implications for financial policy.