Flexible Prices and Leverage
83 Pages Posted: 19 Jan 2017 Last revised: 3 Apr 2017
Date Written: April 2, 2017
The frequency with which firms adjust output prices helps explain persistent differences in capital structure across firms. Unconditionally, the most flexible-price firms have a 19% higher long-term leverage ratio than the most sticky-price firms, controlling for known determinants of capital structure. Sticky-price firms increased leverage more than flexible-price firms following the staggered implementation of bank deregulation across states and over time, which we use in a difference-in-differences strategy. Firms' frequency of price adjustment did not change around the deregulation.
Keywords: Capital Structure, Nominal Rigidities, Bank Deregulation, Industrial Organization and Finance, Price Setting, Bankruptcy
JEL Classification: E12, E44, G28, G32, G33
Suggested Citation: Suggested Citation