Collateral, Taxes, and Leverage

Shaojin Li, Toni M. Whited, Yufeng Wu

Research output: Contribution to journalArticlepeer-review


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 languageEnglish (US)
Pages (from-to)1453-1500
Number of pages48
JournalReview of Financial Studies
Issue number6
StatePublished - Jun 18 2016

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics


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