Capital Structure and the Yield Curve

74 Pages Posted: 2 Feb 2022 Last revised: 15 Aug 2022

See all articles by Diogo Duarte

Diogo Duarte

Florida International University

Özde Öztekin

Florida International University (FIU)

Yuri Saporito

Getulio Vargas Foundation (FGV) - EMAp - School of Applied Mathematics

Date Written: November 30, 2021

Abstract

We develop a dynamic capital structure model where interest rates are stochastic and driven by three state variables: level, slope, and curvature of the yield curve in an arbitrage-free Nelson-Siegel model. Our analysis suggests that the yield-curve factors are critical determinants of the capital structure of firms and that an increase in any of the three factors are followed by an increase of the firm's debt and a shortening of its debt maturity. Using data on US firms from 1985 to 2020, we perform two-stage least squares system of equations that account for the joint determination of leverage and debt maturity and confirm our model's predictions.

Keywords: Capital Structure, Debt Maturity, Term Structure.

JEL Classification: E43, G12, G32

Suggested Citation

Duarte, Diogo and Öztekin, Özde and Saporito, Yuri, Capital Structure and the Yield Curve (November 30, 2021). Available at SSRN: https://ssrn.com/abstract=3974871 or http://dx.doi.org/10.2139/ssrn.3974871

Diogo Duarte

Florida International University ( email )

11200 S.W. 8th St., 236
Miami, FL 33199
United States

Özde Öztekin (Contact Author)

Florida International University (FIU) ( email )

University Park
11200 SW 8th Street
Miami, FL 33199
United States

Yuri Saporito

Getulio Vargas Foundation (FGV) - EMAp - School of Applied Mathematics ( email )

Praia de Botafogo
Rio de Janeiro, 22250-900
Brazil

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