Credit Market Segmentation and Capital Structure Stability

Abstract

This paper studies the impacts of capital market segmentation due to credit ratings on the stability of corporate capital structures. We provide novel empirical methods for measuring capital structure stability and identifying the effect of capital market segmentation on it. Comparing the matched firms just above and just below the investment-grade cutoff, we show that the investment-grade firms maintain more stable capital structures. This effect does not exist at other credit rating thresholds. The investment-grade firms' better access to capital can drive the results. The results persist within conventional methods for measuring leverage stability.

Keywords: credit market segmentation, capital structure, capital structure stability

JEL Classification: G24, G32