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RFS Advance Access originally published online on October 28, 2005
Review of Financial Studies 2006 19(1):45-79; doi:10.1093/rfs/hhj003
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© The Author 2005. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For permissions, please email: journals.permissions@oxfordjournals.org.

Does the Source of Capital Affect Capital Structure?

Michael Faulkender
Washington University in St. Louis

Mitchell A. Petersen
Northwestern University and NBER

Address correspondence to: Mitchell Petersen, 2001 Sheridan Road, Evanston, IL 60208. E-mail: mpetersen{at}kellogg.northwestern.edu.

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.


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