| This dissertation consists of two essays on empirical capital structure. First, I examine the dispersion of capital structures among firms within an industry, and then relate this dispersion to industry characteristics. This empirical analysis allows me to assess the main implications of some of the leading theories on the capital structures of competitors in a given industry. I find that, all else equal, intra-industry capital structure dispersion is greater in industries (1) that are highly concentrated, (2) with looser corporate governance practices, and (3) in which assets are easier to transfer. I also find greater dispersion in industries where firms use different production technologies, in older industries, and in industries with abundant growth opportunities. The evidence supports the importance of agency effects on capital structure and suggests that liquidity provision by competitors, as well as technological factors, can be relevant to a firm's capital structure choices. Second, I empirically study the effect of a firm's leverage on its debt rating taking into account the endogeneity in this relationship. If leverage and ratings are jointly affected by exogenous and unobservable shocks related to the firm's fundamental risk, simple cross-sectional regression analysis will show that the leverage's effect on ratings is less strong than it really is. To address this issue, I use an instrumental-variable approach, in which I instrument leverage, and re-estimate the leverage impact on ratings. I find that the impact of leverage on ratings is still negative and significantly stronger. This result is even more apparent when the firms are financially unconstrained. The stronger effect of leverage on ratings provides at least a partial explanation to the capital structure puzzle of why firms do not use leverage more aggressively to reduce their cost of capital. |
