Abstract

http://ssrn.com/abstract=968258
 
 

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The Cost of Debt


Jules H. Van Binsbergen


University of Pennsylvania - The Wharton School; National Bureau of Economic Research (NBER)

John R. Graham


Duke University; National Bureau of Economic Research (NBER)

Jie Yang


Georgetown University - McDonough School of Business

May 11, 2010

Journal of Finance, Forthcoming
WFA 2007 Big Sky, MT Meetings Paper
EFA 2007 Ljubljana Meetings Paper

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.

Number of Pages in PDF File: 65

Keywords: capital structure, cost of debt

JEL Classification: G30, G32

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Date posted: March 8, 2007 ; Last revised: September 15, 2013

Suggested Citation

van Binsbergen, Jules H. and Graham, John R. and Yang, Jie, The Cost of Debt (May 11, 2010). Journal of Finance, Forthcoming; WFA 2007 Big Sky, MT Meetings Paper; EFA 2007 Ljubljana Meetings Paper. Available at SSRN: http://ssrn.com/abstract=968258 or http://dx.doi.org/10.2139/ssrn.968258

Contact Information

Jules H. Van Binsbergen (Contact Author)
University of Pennsylvania - The Wharton School ( email )
3641 Locust Walk
Philadelphia, PA 19104-6365
United States
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
HOME PAGE: http://www.nber.org/people/jules_vanbinsbergen
John Robert Graham
Duke University ( email )
Box 90120
Durham, NC 27708-0120
United States
919-660-7857 (Phone)
919-660-8030 (Fax)
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Jie Yang
Georgetown University - McDonough School of Business ( email )
3700 O Street, NW
Washington, DC 20057
United States
(202) 687-5497 (Phone)
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