Capital Structure and Debt Structure

Capital Structure and Debt Structure

By
Joshua D. Rauh, Amir Sufi
The Review of Financial Studies. December
1, 2010, Vol. 23, Issue 12, Pages 4242-4280

Using a novel dataset that records individual debt issues on the balance sheets of public firms, we demonstrate that traditional capital structure studies that ignore debt heterogeneity miss substantial capital structure variation. 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. 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 reduce incentive conflicts.