Inequality and capital structure

Abstract

High-income individuals direct a higher share of their savings toward the stock market and a lower share toward credit markets and bank deposits. An increase in income inequality thus translates into an expected decrease in the relative supply of debt capital. Nonfinancial corporations are predicted to cater to these shifts by adjusting their capital structure. Results from instrumental variable models estimated on a panel sample of either US or non-US corporations and several robustness checks empirically support this prediction. Consistent with the theorized household portfolio channel, the negative relation between leverage and local income inequality is driven by corporations less likely to have access to non-local capital markets. This result is confirmed when exploiting the introduction of the euro as an exogenous shock to European firms’ relative exposure to non-domestic investors.