How Big are the Tax Benefits of Debt?

65 Pages Posted: 1 Jul 1998  

John R. Graham

Duke University; National Bureau of Economic Research (NBER)

Date Written: May 1998

Abstract

This paper estimates how much "interest deductibility" contributes to firm value. By integrating under firm-specific benefit functions, the present value tax benefit of interest deductions is estimated to equal approximately 10% of firm value. The economy-wide benefit peaked at about $118 billion in 1990 (or about $60 billion, net of the personal tax penalty).

The implicit cost of debt is inferred by observing where firms locate on their interest-deduction benefit curves. Paradoxically, profitable firms with low apparent costs are very conservative in their pursuit of interest deductions. Conservative debt policy is persistent and firms do not use their financial slack to fund future capital expenditures or acquisitions.

JEL Classification: G31, G32, H25

Suggested Citation

Graham, John R., How Big are the Tax Benefits of Debt? (May 1998). Available at SSRN: https://ssrn.com/abstract=92559 or http://dx.doi.org/10.2139/ssrn.92559

John Robert Graham (Contact Author)

Duke University ( email )

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National Bureau of Economic Research (NBER)

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