The Cost of Debt / Jules H. van Binsbergen, John Graham, Jie Yang.

Format:

Book

Author/Creator:

van Binsbergen, Jules H.

Contributor:

National Bureau of Economic Research.

Graham, John.

Yang, Jie.

Series:

Working Paper Series (National Bureau of Economic Research) no. w16023.

NBER working paper series no. w16023

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2010.

Summary:

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.

Notes:

Print version record

May 2010.