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Does the Source of Capital Affect Capital Structure?

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  • Michael Faulkender
  • Mitchell A. Petersen

Abstract

Prior work on leverage implicitly assumes capital availability depends solely on firm characteristics. However, market frictions that make capital structure relevant may also be associated with a firm's source of capital. Examining this intuition, we find firms that have access to the public bond markets, as measured by having a debt rating, have significantly more leverage. Although firms with a rating are fundamentally different, these differences do not explain our findings. Even after controlling for firm characteristics that determine observed capital structure, and instrumenting for the possible endogeneity of having a rating, firms with access have 35% more debt. Copyright 2006, Oxford University Press.

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  • Michael Faulkender & Mitchell A. Petersen, 2006. "Does the Source of Capital Affect Capital Structure?," Review of Financial Studies, Society for Financial Studies, vol. 19(1), pages 45-79.
  • Handle: RePEc:oup:rfinst:v:19:y:2006:i:1:p:45-79
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