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Capital Structure and the Yield Curve

Author

Listed:
  • Diogo Duarte
  • Özde Öztekin
  • Yuri F Saporito

Abstract

We develop a dynamic capital structure model in which interest rates are stochastic and driven by three state variables: level, slope, and curvature of the yield curve in an arbitrage-free Nelson-Siegel model. Our analysis suggests that the yield-curve factors are critical determinants of the capital structure of firms and that an increase in any of the three factors is followed by an increase of the firm’s leverage and a shortening of its debt maturity. We perform a two-stage least squares system of equations that accounts for the joint determination of leverage and debt maturity and confirms our model’s predictions. (JEL E43, G12, G32)

Suggested Citation

  • Diogo Duarte & Özde Öztekin & Yuri F Saporito, 2025. "Capital Structure and the Yield Curve," The Review of Corporate Finance Studies, Society for Financial Studies, vol. 14(1), pages 85-124.
    • Handle: RePEc:oup:rcorpf:v:14:y:2025:i:1:p:85-124.
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    File URL: http://hdl.handle.net/10.1093/rcfs/cfac036
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    More about this item

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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