Episodic Stability in Capital Structure: The Role of Credit Market Segmentation

Abstract

The existence of corporate leverage stability is a key debate in recent capital structure studies. We propose a novel method based on within-zone leverage variations to measure the length and pervasiveness of stable leverage episodes at the firm level and identify their determinants. We find that while stability episodes exist and are widespread, they vary largely across firms. Further, we investigate a leading determinant of such episodes' length: credit market segmentation. Firms just above the investment-grade/ speculative-grade cutoff have significantly longer episodes of leverage stability than matched firms just below the cutoff. Superior access to credit for investment-grade firms is an important driver of the results. The results are stronger among firms with higher financial constraints and external finance dependence. Speculative-grade firms' violation of stable episodes arises more often due to their lower ability to raise debt. Our findings are robust to a battery of robustness checks and falsification tests. %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