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Capital Structure and Debt Structure

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  • 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.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 14488.

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Date of creation: Nov 2008
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Publication status: published as Joshua D. Rauh & Amir Sufi, 2010. "Capital Structure and Debt Structure," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 23(12), pages 4242-4280, December.
Handle: RePEc:nbr:nberwo:14488

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Cited by:
  1. Gropp, Reint & Hirsch, Christian & Krahnen, Jan Pieter, 2011. "Is rated debt arm's length? Evidence from mergers and acquisitions," CFS Working Paper Series 2011/10, Center for Financial Studies (CFS).
  2. Karampatsas, Nikolaos & Petmezas, Dimitris & Travlos, Nickolaos G., 2014. "Credit ratings and the choice of payment method in mergers and acquisitions," Journal of Corporate Finance, Elsevier, Elsevier, vol. 25(C), pages 474-493.
  3. Isil Erel & Brandon Julio & Woojin Kim & Michael S. Weisbach, 2012. "Macroeconomic Conditions and Capital Raising," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 25(2), pages 341-376.
  4. Beyhaghi, Mehdi & Mahmoudi, Babak & Mohammadi, Ali, 2014. "Adverse Selection and Search Frictions in Corporate Loan Contracts," Working Paper Series in Economics and Institutions of Innovation, Royal Institute of Technology, CESIS - Centre of Excellence for Science and Innovation Studies 350, Royal Institute of Technology, CESIS - Centre of Excellence for Science and Innovation Studies.
  5. Choi, Jaewon & Hackbarth, Dirk & Zechner, Josef, 2013. "Granularity of corporate debt," CFS Working Paper Series 2013/26, Center for Financial Studies (CFS).
  6. Tucker, Jon & Stoja, Evarist, 2011. "Industry membership and capital structure dynamics in the UK," International Review of Financial Analysis, Elsevier, Elsevier, vol. 20(4), pages 207-214, August.

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