Distress costs can be explained as this: The tax benefits of debt financing predominate at low debt levels but as debt increases, the costs of financial distress grow to the point where they outweigh the tax advantages.

9:03 2 4IG Ill 33% - Expert Q&A Q7: Is Asset Tangibility a significant predictor of capital structure? Q8: How do you interpret the coefficient on Asset Tangibility (consider the discussion of Distress Costs in Chapter 6)? A B C D G SUMMARY OUTPUT Regression Statistics Multiple R 0.245217848 R Square 0.060131793 Adjusted R Square 0.058244507 Standard Error 16.62930595 Observations 500 ANOVA df SS MS F Significance F Regression 8810.788661 8810.788661 31.86152342 2.78339E-08 Residual 498 137713.8405 276.5338162 Total 499 146524.6291 Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0% Intercept 18.0417555 1.539070836 11.72249846 3.39615E-28 15.01788304 21.06562797 15.01788304 21.06562797 Asset Tangibility 12.72527218 2.25441472 5.644601263 2.78339E-08 8.295935693 17.15460866 8.295935693 17.15460866 O K