The Cost of Debt

We estimate firm-specific marginal cost of corporate debt functions for several thousand companies between 1980 and 2006. The positively sloped marginal cost curves are identified by observing exogenous shifts in simulated tax benefit curves. By integrating the area between the benefit and cost functions we estimate that the net benefit of debt is about 3% of asset value, resulting from a gross benefit of debt of about 10% of asset value and a cost of debt of about 7%. Our findings are consistent over time and when accounting for fixed adjustment costs of debt. The location of a given company