Download this Paper Open PDF in Browser

The Cost of Debt

65 Pages Posted: 8 Mar 2007 Last revised: 15 Sep 2013

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

Board of Governors of the Federal Reserve System

Multiple version iconThere are 2 versions of this paper

Date Written: May 11, 2010

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: capital structure, cost of debt

JEL Classification: G30, G32

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: https://ssrn.com/abstract=968258 or http://dx.doi.org/10.2139/ssrn.968258

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

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Paper statistics

Downloads
2,747
Rank
3,171
Abstract Views
10,701