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Shocks to the cost of borrowing and capital structure

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  • Cuñat, Vicente
  • Gonzalez-Iturriaga, Claudio

Abstract

We use the imposition of a non remunerated reserve on short term borrowing in Chile in 1991 as a cuasi natural experiment to test the effects of an increase in the cost of short term borrowing on capital structure and investment. The differential impact of this regulatory measure across firms allows us to perform a difference in differences analysis. We find a drastic drop in short term borrowing of regulated firms that was almost completely offset by additional long term borrowing. The nature of the experiment allows us to isolate a clear causality from changes in the cost of funds to capital structure, solving some of the endogeneity problems present in preexisting literature.

Suggested Citation

  • Cuñat, Vicente & Gonzalez-Iturriaga, Claudio, 2005. "Shocks to the cost of borrowing and capital structure," LSE Research Online Documents on Economics 43165, London School of Economics and Political Science, LSE Library.
    • Handle: RePEc:ehl:lserod:43165
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    File URL: http://eprints.lse.ac.uk/43165/
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    References listed on IDEAS

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    JEL classification:

    • F3 - International Economics - - International Finance
    • G3 - Financial Economics - - Corporate Finance and Governance

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