Working-Capital and Capital Structure
56 Pages Posted: 13 Nov 2019
Date Written: November 1, 2019
Survey evidence suggests that a firm's operating features affect its financial leverage (Graham and Harvey, 2001). We document the effect on leverage of a company's working capital – its inventory, receivables, and payables. Higher inventories and receivables tend to reduce a firm's asset risk, which is conducive to higher leverage, better credit ratings, more long-term debt and fewer equity issuances. Higher payables provide a fixed, senior claim on firm earnings and substitute for interest-bearing debt. Increases in payables reduce leverage, credit ratings, and short-term debt issuances, but increase equity issuances. Our findings imply strong influences of working-capital on corporate capital structures.
Keywords: Working Capital, Inventories, Receivables, Payables, Capital Structure, Leverage
JEL Classification: G18, G21, G28
Suggested Citation: Suggested Citation