Does the Source of Capital Affect Capital Structure?

52 Pages Posted: 4 Sep 2003 Last revised: 4 Nov 2010

See all articles by Michael W. Faulkender

Michael W. Faulkender

University of Maryland - Robert H. Smith School of Business

Mitchell A. Petersen

Northwestern University - Kellogg School of Management; National Bureau of Economic Research (NBER)

Multiple version iconThere are 3 versions of this paper

Date Written: September 2003

Abstract

Empirical examinations of capital structure have led some to conclude that firms are under-levered. Implicit in this argument and much of the empirical work on leverage is the assumption that the availability of incremental capital depends solely on the risk of the firm's cash flows and characteristics of the firm. However, the same market frictions that make capital structure relevant suggest that firms may be rationed by lenders, leading some firms to appear to be under-levered relative to unconstrained firms. We examine this theory, arguing that the same characteristics that may be associated with firms being rationed by the debt markets are also associated with financial intermediaries, opposed to bond markets, being the source of a firm's debt capital. We find that firms have significantly different leverage ratios based on whether they have access to public bond markets as measured by the firm having a debt rating. Although firms with a debt rating are fundamentally different, these differences do not explain our findings. Even after controlling for the firm characteristics previously found to determine observed capital structure and the possible endogeneity of having a bond rating, we find that firms which are able to raise debt from public markets have 40 percent more debt.

Suggested Citation

Faulkender, Michael W. and Petersen, Mitchell A., Does the Source of Capital Affect Capital Structure? (September 2003). NBER Working Paper No. w9930. Available at SSRN: https://ssrn.com/abstract=439612

Michael W. Faulkender

University of Maryland - Robert H. Smith School of Business ( email )

College Park, MD 20742-1815
United States

Mitchell A. Petersen (Contact Author)

Northwestern University - Kellogg School of Management ( email )

2001 Sheridan Road
Evanston, IL 60208
United States
847-467-1281 (Phone)
847-491-5719 (Fax)

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States
847-467-1281 (Phone)
847-491-5719 (Fax)

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