Are Firms Underleveraged? An Examination of the Effect of Leverage on Default Probabilities

Unknown author

297 citations0/0 files storedThe Journal of Finance

No readable copy stored yet — this record is metadata only.

No open-access location is known for this record yet.

Literature note Cite in a project Citation map

Corporate Finance and Governance Credit Risk and Financial Regulations Financial Distress and Bankruptcy Prediction

Abstract

ABSTRACT A commonly held view in corporate finance is that firms are less leveraged than they should be, given the potentially large tax benefits of debt. In this paper, I study the effect of firms' leverage on default probabilities as represented by the firms' ratings. Using an instrumental variable approach, I find that the leverage's effect on ratings is three times stronger than it is if the endogeneity of leverage is ignored. This stronger effect results in a higher impact of leverage on the ex ante costs of financial distress, which can offset the current estimates of the tax benefits of debt.

Paper brief

Loading…

Cite this work

Citation unavailable for this work.

BibTeX RIS CSL-JSON

No public copy is stored for this record, so only the metadata is cited.

Citations in this library

Citation map →

Stored only when both papers are in the corpus — 297 citations exist upstream.

References

1976Theory of the firm: Managerial behavior, agency costs and ownership structure 1984Corporate financing and investment decisions when firms have information that investors do not have 1968FINANCIAL RATIOS, DISCRIMINANT ANALYSIS AND THE PREDICTION OF CORPORATE BANKRUPTCY 1977Determinants of corporate borrowing 1984The Capital Structure Puzzle 1997Do Investment-Cash Flow Sensitivities Provide Useful Measures of Financing Constraints?1988The Determinants of Capital Structure Choice 1963CORPORATE INCOME TAXES AND THE COST OF CAPITAL: A CORRECTION

Cited by

2009Market conditions, default risk and credit spreads 2009Information asymmetry and firms’ credit market access: Evidence from Moody's credit rating format refinement 2010Have the tax benefits of debt been overestimated?2005In Search of Distress Risk 2009Ownership and capital structure in Latin America 2009Employee well-being, firm leverage, and bankruptcy risk

Explore the map →

Papers that cite the same references — the relational fallback while embeddings are still backfilling.

Imported from OpenAlex (CC0) — nothing here is generated.