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.
| Original language | English (US) |
|---|---|
| Pages (from-to) | 1453-1500 |
| Number of pages | 48 |
| Journal | Review of Financial Studies |
| Volume | 29 |
| Issue number | 6 |
| DOIs | |
| State | Published - Jun 18 2016 |
ASJC Scopus subject areas
- Accounting
- Finance
- Economics and Econometrics
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Cite this
Li, S., Whited, T. M., & Wu, Y. (2016). Collateral, Taxes, and Leverage. Review of Financial Studies, 29(6), 1453-1500. https://doi.org/10.1093/rfs/hhw008