Interest rate fluctuations and corporate financial leverage

Jiawei Zhao and Yibo Han

Finance Research Letters, 2025, vol. 80, issue C

Abstract: Interest rates directly affect corporate financing costs. In this paper, we explore the implications of interest rate fluctuations for corporate financing choices. Based on Chinese macro- and micro-data spanning from 2000 to 2023, we document that interest rate fluctuations are negatively related to corporate financial leverage and this effect is attenuated by corporate credit rating. The results are validated by a number of endogeneity and sensitivity tests. Further investigation reveals that cash holdings and trade credit are vital economic channels underlying the main relationship. Overall, this research greatly advances the literature on interest rates and financial leverage.

Keywords: Interest rate; Fluctuation; Financial leverage; Cash holdings (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:80:y:2025:i:c:s1544612325006075

DOI: 10.1016/j.frl.2025.107344

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