I estimate the market's opinion of ex-ante costs of ¯nancial distress (CFD) from a structurally motivated model of the industry, using a panel dataset of monthly market values of debt and equity for 269 ¯rms in 23 industries between 1994 and 2004. CFD are identi¯ed from market values and betas of a company's debt and equity. The market expects costs of ¯nancial distress of 5% of ¯rm value for observed leverage ratios. In bankruptcy, distress costs can rise as high as 31%. Across industries, CFD are driven primarily by the potential for debt overhang problems and distressed asset ¯re-sales. There is considerable empirical support for the hypothesis that ¯rms choose a leverage ratio based on the trade-o® between tax bene¯ts and CFD. The results do not con¯rm the under-leverage puzzle for ¯rms with publicly traded debt.