Does the Source of Capital Affect Capital Structure?

Michael Faulkender and Mitchell Petersen

No 9930, NBER Working Papers from National Bureau of Economic Research, Inc

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.

JEL-codes: G3 (search for similar items in EconPapers)
Date: 2003-09
New Economics Papers: this item is included in nep-cfn and nep-mfd
Note: CF
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Citations: View citations in EconPapers (13)

Published as Faulkender, Michael, and Mitchell A. Petersen. "Does the Source of Capital Affect Capital Structure?" Proceedings, Federal Reserve Bank of Chicago, May 2003, pages 200-215
Published as Faulkender, Michael, and Mitchell A. Petersen. "Does the Source of Capital Affect Capital Structure?" Review of Financial Studies 19(1): 45-79, Spring 2006

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Journal Article: Does the Source of Capital Affect Capital Structure? (2006)
Working Paper: Does the source of capital affect capital structure? (2003)
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