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Does the Source of Capital Affect Capital Structure?

  1. Michael Faulkender
  1. Washington University in St. Louis
  1. Mitchell A. Petersen
  1. Northwestern University and NBER
  1. Address correspondence to: Mitchell Petersen, 2001 Sheridan Road, Evanston, IL 60208. E-mail: mpetersen{at}kellogg.northwestern.edu.

    Abstract

    Prior work on leverage implicitly assumes capital availability depends solely on firm characteristics. However, market frictions that make capital structure relevant may also be associated with a firm’s source of capital. Examining this intuition, we find firms that have access to the public bond markets, as measured by having a debt rating, have significantly more leverage. Although firms with a rating are fundamentally different, these differences do not explain our findings. Even after controlling for firm characteristics that determine observed capital structure, and instrumenting for the possible endogeneity of having a rating, firms with access have 35% more debt.

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        This Article

        1. Rev. Financ. Stud. (Spring 2006) 19 (1): 45-79. doi: 10.1093/rfs/hhj003 First published online: October 28, 2005
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