Working Paper: NBER ID: w16023
Authors: Jules H. Van Binsbergen; John Graham; Jie Yang
Abstract: We estimate firm-specific marginal cost of debt functions for a large panel of companies between 1980 and 2007. The marginal cost curves are identified by exogenous variation in the marginal tax benefits of debt. The location of a given company's cost of debt function varies with characteristics such as asset collateral, size, book-to-market, asset tangibility, cash flows, and whether the firm pays dividends. By integrating the area between 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 of debt of 10.4% of asset value and an estimated cost of debt of 6.9%. We find that the cost of being overlevered is asymmetrically higher than the cost of being underlevered and that expected default costs constitute approximately half of the total ex ante cost of debt.
Keywords: cost of debt; capital structure; marginal cost
JEL Codes: G3; G30; G32; G33
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| amount of leverage used (G32) | marginal cost of debt (G32) |
| higher collateral (G51) | cost of debt (G32) |
| size (L25) | marginal cost of debt (G32) |
| book-to-market ratio (G31) | marginal cost of debt (G32) |
| asset tangibility (H82) | marginal cost of debt (G32) |
| cash flows (G19) | marginal cost of debt (G32) |
| dividend-paying status (G35) | marginal cost of debt (G32) |
| costs of being overlevered (G32) | costs of being underlevered (G32) |
| expected default costs (G33) | total ex ante cost of debt (G32) |