Three essays on capital structure determinants
Hosein Maleki, Ph.D.
Concordia University, 2016
The first essay studies the influence of credit ratings on the time-series evolution of corporate capital structures. We show that better rated firms have significantly more stable leverage ratios over time. By comparing firms across the investment-grade cut-off, we conclude using treatment effects estimation, that assignment to more stable rating classes leads to more stable capital structures over time. Extending this study across the whole range of ratings, we show that a one standard deviation improvement in credit-rating quality can reduce the leverage hazard ratio by more than 70%. In alternative investigations, rated firms tend to have largely more stable leverage ratios compared to not-rated firms. Matching firms based on their propensity to have credit ratings, rated firms take between 1.5 and 9 years longer to change their leverage ratios to the same levels as their not-rated counterparts. Our results are robust to the choice of different time frames and variety of controls. They extend the literature of the effects of credit ratings on capital structures by highlighting the importance of credit ratings on the long-run financing behaviors of firms.
The second essay studies the stability of various debt-structure dimensions. Survival and long-run clustering analyses are used to assess the stability of debt-rank orderings, debt heterogeneity and main debt type(s). Firms only maintain stability in their main debt type, while frequently changing the weights and priorities of other debt types, heterogeneity indexes and rank orderings. While all debt structure metrics are less stable with the assignment of a credit rating, the effect on the stability of the main debt type is minor. Firms with higher tax rates, market leverages and cash flow volatilities exhibit higher stability in their debt structures.
The final essay investigates how the optimal corporate debt maturity is influenced by the strength of creditor rights and the efficiencies of contract enforcement mechanisms. Using a correlated random effects specification, we find that across 42 countries stronger creditor rights are associated with shorter corporate debt maturities while greater contract enforcement leads to longer maturities. These empirical results are consistent with the differing effects of creditor rights and contract enforcement on the choice of corporate maturity predicted by our model. Our results are robust to using different measures of debt maturity, individual components of creditor rights and different measures of contract enforcement. Our results are mostly driven by developed country debt and hold with the inclusion of various controls.