Flexible Prices and Leverage

Abstract

The frequency with which firms adjust output prices helps explain persistent differences in capital structure across firms. Unconditionally, the most exible-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 exible-price firms following the staggered implementation of the Interstate Banking and Branching Efficiency Act 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: E120, E440, G280, G320, G330