Episodic Stability in Capital Structure: The Role of Access to Credit

Abstract

This study proposes a novel method based on within-zone leverage variations to measure the magnitude of stable leverage episodes at the firm level. Using this method, we investigate a leading candidate determinant of such episodes’ length: access to credit. Using a discontinuity approach with survival data, we find that firms just above the investment-grade rating cutoff enjoy significantly longer episodes of leverage stability than firms just below the cutoff. The results are stronger among firms with greater external finance dependence and financial constraints. Asymmetric disruptions in stable episodes are associated with a lower ability to raise debt among speculative-grade firms.

Keywords: capital structure stability, access to credit, credit market segmentation, credit ratings

JEL Classification: G24, G32