John Graham
Duke University, Durham, NC 27708
ABSTRACT
By integrating under firm-specific benefit functions. I estimate that the present value tax benefit of interest deductions equals 9.7% of firm value. The economy-wide benefit peaked at $114 billion in 1990 (or as low as $56 million, net of the personal tax penalty). I infer how aggressively firms use debt by observing the shape of their interest-deduction benefit functions. Paradoxically, large, liquid, profitable firms with low expected distress costs use debt conservatively. Product market factors, lack of collateralization, and planning for future expenditures lead to conservative debt usage. Conservative debt policy is persistent.