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

60 Pages Posted: 2 Aug 2018 Last revised: 28 May 2021

See all articles by Jess Cornaggia

Jess Cornaggia

Pennsylvania State University - Department of Finance

Mahsa Kaviani

University of Delaware

Lawrence Kryzanowski

Concordia University, Quebec - John Molson School of Business

Hosein Maleki

Florida State University - College of Business

Date Written: August 1, 2020

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

Suggested Citation

Cornaggia, Jess and Kaviani, Mahsa and Kryzanowski, Lawrence and Maleki, Hosein, Episodic Stability in Capital Structure: The Role of Credit Market Segmentation (August 1, 2020). Fox School of Business Research Paper No. 18-039, Available at SSRN: https://ssrn.com/abstract=3224748 or http://dx.doi.org/10.2139/ssrn.3224748

Jess Cornaggia

Pennsylvania State University - Department of Finance ( email )

University Park, PA 16802
United States

HOME PAGE: http://https://directory.smeal.psu.edu/jnc29

Mahsa Kaviani (Contact Author)

University of Delaware ( email )

20 Orchard Rd, Newark, DE
Newark, DE 19716
United States

Lawrence Kryzanowski

Concordia University, Quebec - John Molson School of Business ( email )

1455 de Maisonneuve Blvd. W.
Montreal, Quebec H3G 1M8
Canada

Hosein Maleki

Florida State University - College of Business ( email )

423 Rovetta Business Building
Tallahassee, FL 32306-1110
United States

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