Colla, Paolo, Ippolito, Filippo and Li, Kai (2012) “Specialization.” Journal of Finance, 68(5), 2117-2141.
This paper examines debt structure using a new and comprehensive database on types of debt employed by public U.S. firms. We find that 85% of the sample firms borrow predominantly with one type of debt, and the degree of debt specialization varies widely across different subsamples—large rated firms tend to diversify across multiple debt types, while small unrated firms specialize in fewer types. We suggest several explanations for why debt specialization takes place, and show that firms employing few types of debt have higher bankruptcy costs, are more opaque, and lack access to some segments of the debt markets. Much attention has been devoted to the questions of why firms choose to issue debt over equity, and how optimal capital structure is designed to minimize a firm’s cost of financing (see the survey by Graham and Leary (2011) of the voluminous literature on capital structure). In this paper, we focus on a related, but much less studied topic in corporate finance, namely debt structure. Our goals are to explore the types of debt commonly employed by publicly listed U.S. firms, and to understand why some firms tend to use relatively few debt types, while others display a more diversified debt structure. To our knowledge, our paper is one of the first to provide large sample evidence on the subject.
Filippo Ippolito is Associate Professor of Finance at the Department of Economics and Business. He teaches the course Financing for Start-ups and he is the coordinator of the corporate finance section at the UPF Barcelona School of Management.
University of British Columbia