Review of Financial Studies Vol. 29 No. 6 2012
Collateral, Taxes, and Leverage
Abstract
We quantify the importance of collateral versus taxes for firms' capital structures. We estimate a dynamic model in which a taxable firm seeks financing for investment, and a dynamic contracting environment motivates endogenous collateral constraints. Optimal leverage stays a safe distance from the constraint, balancing the tax benefit of debt with the cost of lost financial flexibility. We estimate this flexibility cost to be 7.2% of firm assets, a percentage that is comparable to the tax benefit. Models with different tax rates fit the data equally well, and leverage responds to the tax rate only when taxes are low.
- DOI
- 10.1093/rfs/hhw008
- Volume
- 29
- Issue
- 6
- Pages
- 1453-1500
- Language
- en
- Sources
- crossref openalex