How big are the tax benefits of debt?

I integrate under firm-specific benefit functions to estimate that the capi talized tax benefit of debt equals 9.7 percent of firm value (or as low as 4.3 percent, net of personal taxes). The typical firm could double tax bene fits by issuing debt until the marginal tax benefit begins to decline. I in fer how aggressively a firm uses debt by observing the shape of its tax ben efit Function. Paradoxically, large, liquid, profitable Firms with low expe cted distress costs use debt conservatively. Product market factors, growth options, low asset collateral, and planning for future expenditures lead t o conservative debt usage. Conservative debt policy is persistent.