Bank Loan Supply, Lender Choice, and Corporate Capital Structure

Do credit market conditions affect corporate capital structures? In an attempt to answer this question, I study two natural experiments that affect corporate access to bank credit: the 1961 expansion of bank credit due to the emergence of the market for CDs, and the contraction associated with the 1966 credit crunch. I document several capital structure reactions to these changes in credit market liquidity. First, relative to firms with public debt market access, the leverage ratios of bank-dependent firms decrease (increase) following a contraction (expansion) of bank credit. Second, firms alter the composition of financing sources in response to tight credit. Bank-dependent firms shift towards equity when bank debt is scarce. Non-bank-dependent firms shift between bank debt and public debt markets. These results indicate that observed leverage ratios and debt placement structures are not determined solely by changes in firms’ demand for capital structures. Rather, supply frictions in the credit markets are an important determinant of corporate capital structures, particularly for bank-dependent firms. Thus, the same capital market imperfections that create a link between the banking sector and economic growth also create a link between credit conditions and firms’ financial structures.