Working Paper: NBER ID: w14488
Authors: Joshua D. Rauh; Amir Sufi
Abstract: Using a novel data set that records individual debt issues on the balance sheet of a large random sample of rated public firms, we show that a recognition of debt heterogeneity leads to new insights into the determinants of corporate capital structure. We first demonstrate that traditional capital structure studies that ignore debt heterogeneity miss a substantial fraction of capital structure variation. We then show that relative to high credit quality firms, low credit quality firms are more likely to have a multi-tiered capital structure consisting of both secured bank debt with tight covenants and subordinated non-bank debt with loose covenants. Further, while high credit quality firms enjoy access to a variety of sources of discretionary flexible sources of finance, low credit quality firms rely on tightly monitored secured bank debt for liquidity. We discuss the extent to which these findings are consistent with existing theoretical models of debt structure in which firms simultaneously use multiple debt types to preserve manager and creditor incentives.
Keywords: Capital Structure; Debt Structure; Corporate Finance
JEL Codes: G21; G30; G32; M41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| credit quality (L15) | capital structure (G32) |
| lower credit quality firms (G32) | multitiered capital structure (G32) |
| high credit quality firms (G32) | reliance on senior unsecured debt and equity (G32) |
| lower credit quality firms (G32) | secured bank debt and subordinated bonds (G21) |
| credit quality deterioration (G33) | significant changes in debt structure (G32) |
| downgrade (Y60) | increased reliance on secured and subordinated debt (G32) |