Does the Source of Capital Affect Capital Structure?
52 Pages Posted: 4 Sep 2003 Last revised: 21 Aug 2022
There are 3 versions of this paper
Does the Source of Capital Affect Capital Structure?
Does the Source of Capital Affect Capital Structure?
Does the Source of Capital Affect Capital Structure?
Date Written: September 2003
Abstract
Empirical examinations of capital structure have led some to conclude that firms are under-levered. Implicit in this argument and much of the empirical work on leverage is the assumption that the availability of incremental capital depends solely on the risk of the firm's cash flows and characteristics of the firm. However, the same market frictions that make capital structure relevant suggest that firms may be rationed by lenders, leading some firms to appear to be under-levered relative to unconstrained firms. We examine this theory, arguing that the same characteristics that may be associated with firms being rationed by the debt markets are also associated with financial intermediaries, opposed to bond markets, being the source of a firm's debt capital. We find that firms have significantly different leverage ratios based on whether they have access to public bond markets as measured by the firm having a debt rating. Although firms with a debt rating are fundamentally different, these differences do not explain our findings. Even after controlling for the firm characteristics previously found to determine observed capital structure and the possible endogeneity of having a bond rating, we find that firms which are able to raise debt from public markets have 40 percent more debt.
Suggested Citation: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
What Do We Know About Capital Structure? Some Evidence from International Data
By Raghuram G. Rajan and Luigi Zingales
-
The Theory and Practice of Corporate Finance: Evidence from the Field
By John R. Graham and Campbell R. Harvey
-
The Theory and Practice of Corporate Finance: The Data
By John R. Graham and Campbell R. Harvey
-
Market Timing and Capital Structure
By Malcolm P. Baker and Jeffrey Wurgler
-
Market Timing and Capital Structure
By Malcolm P. Baker and Jeffrey Wurgler
-
Testing Tradeoff and Pecking Order Predictions About Dividends and Debt
By Eugene F. Fama and Kenneth R. French
-
Testing Static Trade-Off Against Pecking Order Models of Capital Structure
-
Optimal Capital Structure Under Corporate and Personal Taxation
By Harry Deangelo and Ronald W. Masulis