Capital Structure and Debt Structure
Capital Structure and Debt Structure*
Joshua D. Rauh Kellogg School of Management and NBER
Amir Sufi University of Chicago Booth School of Business and NBER
February 2010
*We thank Doug Diamond, Anil Kashyap, Gordon Phillips, Michael Roberts, Toni Whited, Luigi Zingales, and seminar participants at Emory University, Georgetown University, Maastricht University, Rice University, Tilburg University, the University of California-Berkeley, the University of Chicago, the University of Colorado, the University of Maryland, the University of Minnesota, the University of Toronto, York University, and the Spring 2008 NBER Corporate Finance meeting for comments. We gratefully acknowledge financial support from the Center for Research in Security Prices and the IBM Corporation. Thanks to Ram Chivukula and Adam Friedlan for excellent research assistance. Rauh: (847) 491 4462, joshua-rauh@kellogg.northwestern.edu; Sufi: (773) 702 6148, amir.sufi@chicagobooth.edu
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Electronic copy available at: http://ssrn.com/abstract=1097577
ABSTRACT
Using a novel data set that records individual debt issues on the balance sheets of public firms, we demonstrate that traditional capital structure studies that ignore debt heterogeneity miss substantial capital structure variation. 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. 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 reduce incentive conflicts.
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Electronic copy available at: http://ssrn.com/abstract=1097577
What determines corporate capital structure? Despite a large body of research on this question, it remains one of the most hotly contested issues in financial economics. Our analysis of this
Joshua D. Rauh Kellogg School of Management and NBER
Amir Sufi University of Chicago Booth School of Business and NBER
February 2010
*We thank Doug Diamond, Anil Kashyap, Gordon Phillips, Michael Roberts, Toni Whited, Luigi Zingales, and seminar participants at Emory University, Georgetown University, Maastricht University, Rice University, Tilburg University, the University of California-Berkeley, the University of Chicago, the University of Colorado, the University of Maryland, the University of Minnesota, the University of Toronto, York University, and the Spring 2008 NBER Corporate Finance meeting for comments. We gratefully acknowledge financial support from the Center for Research in Security Prices and the IBM Corporation. Thanks to Ram Chivukula and Adam Friedlan for excellent research assistance. Rauh: (847) 491 4462, joshua-rauh@kellogg.northwestern.edu; Sufi: (773) 702 6148, amir.sufi@chicagobooth.edu
1
Electronic copy available at: http://ssrn.com/abstract=1097577
ABSTRACT
Using a novel data set that records individual debt issues on the balance sheets of public firms, we demonstrate that traditional capital structure studies that ignore debt heterogeneity miss substantial capital structure variation. 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. 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 reduce incentive conflicts.
2
Electronic copy available at: http://ssrn.com/abstract=1097577
What determines corporate capital structure? Despite a large body of research on this question, it remains one of the most hotly contested issues in financial economics. Our analysis of this
References: 3 See Johnson (1997), Kaplan and Zingales (1997), and Sufi (2009) for more discussion on these regulations 4 placements held by one or two insurance companies (Fenn, 2000; Gomes and Phillips, 2005) 5 See Table I in Barclay and Smith (1995) and Baird and Rasmussen (2006) for support of this classification 9 For example, Billett, King, and Mauer (2007) state: “…public borrowers and private borrowers tend to be distinct 10 Diamond (1991b) interprets his model as describing the trade-off between bank debt and commercial paper, not 11 Bolton and Freixas (2000) also investigate the use of equity, which is used as the primary source of financing by