Capital Structure and Debt Structure

Using a novel data set that records individual debt issues on the balance sheet of a large sample of rated public firms, we show that recognition of debt heterogeneity leads to new insights into the determinants of corporate capital structure. We first demonstrate that traditional capital structure studies that ignore debt heterogeneity miss a substantial fraction of capital structure variation. We then show that 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. Further, while high credit quality firms enjoy access to a variety of sources of discretionary flexible sources of finance, low credit quality firms rely on tightly monitored secured bank debt for liquidity. The findings are similar when we focus on plausibly exogenous credit quality variation in a sample of "fallen angels," which are firms that are downgraded from investment grade to speculative grade by Moody's Investors Services. 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