Corporate Debt Issuance and the Historical Level of Interest Rates

Author(s): Christopher B. Barry, Steven C. Mann, Vassil T. Mihov and Mauricio Rodríguez
Reviewed work(s):
Source: Financial Management, Vol. 37, No. 3 (Autumn, 2008), pp. 413-430
Published by: Blackwell Publishing on behalf of the Financial Management Association International
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 Corporate Debt Issuance and the
Historical Level of Interest Rates
Christopher B. Barry, Steven C. Mann, Vassil T. Mihov,
and Mauricio Rodriguez*

Using a sample that comprises more than 14,000 new issues of corporate debt for the period
1970-2001, we examine the relation between debt issues and the level of interest rates relative
to historical levels. Consistent with recent survey evidence, wefind that companies issue more
debt, more debt relative to investment spending, and more debt compared to equity when interest
rates are low relative to historical rates. The effects continue to hold when we controlfor other
variables that influence debt issuance and when we accountfor refinancing.

In the neoclassical
theory of investment, a drop in the cost of capital results in increased
investment spending. As firms increase their investments, all else equal, they also tend to issue
new debt to finance a portion of those investments. Thus, debt issuance can be a function of the
level of capital investment by firms. Alternatively, firms may try to time debt issuance if they
believe that interest rates are advantageous relative to where rates were previously. We define
"timing of interest rates" as the practice of issuing debt, relative to financing needs and capital
expenditures, when interest rates are low compared to historical levels.
We provide evidence that links debt issuance to changes in interest rates relative to their his
torical levels. To distinguish between a timing theory and a more standard neoclassical story,
we ask whether firms issue more debt relative to their investment plans (capital expenditures)
or relative to equity issuance, following changes in interest rates. We find that past interest
rates have prominent effects on the issuance of debt: when current interest rates are low rel
ative to historical levels, firms tend to issue more debt. These effects occur even after we
account for other factors that can lead to debt issuance, such as capital expenditures, refinancing,
firm size and profitability, the level of corporate cash flow, interest rate spreads, and equity
valuation.
Consistent with Graham and Harvey's (2001) survey evidence that "managers attempt to time
interest rates by issuing debt when they feel that market interest rates are particularly low," we

The authors are grateful to Stan Block, Mike Cliff, Michel Dubois, Espen Eckbo, Wayne Ferson, John Graham, Robin
Greenwood, Robert Kieschnick, Erik Lie, Steve Lim, Pete Locke, Ehud Ronn, Andy Waisburd, the seminar participants
at the 2004 Winter Finance Workshop, the 2004 European Meetings of the Financial Management Association, the
2004 Meetings of the Financial Management Association, the University of Alabama, University of Connecticut, Ohio
University, and the editor and referees for their helpful comments. We appreciate helpful discussions about corporate
borrowing strategies and practices with Tom Hund, CFO, and Linda Hurt, Treasurer, of Burlington Northern Santa Fe.
Professors Mann, Mihov, and Rodriguez acknowledge research funding from the Charles Tandy American Enterprise
Center and the Luther King Capital Management Center for Financial Studies at Texas Christian University.

*Christopher B. Barry is a Professor of Finance and the Robert and Maria Lowdon Chair in Business Administration,
MJ Neeley School of Business at Texas Christian University, Fort Worth, TX. Steven C. Mann and Vassil T Mihov are
Associate Professorsof Finance,MJ Neeley School of Business at TexasChristianUniversity,FortWorth,TXMauricio
Rodriguez is a Professor of Finance and Real Estate, MJ Neeley School of Business at Texas Christian University, Fort
Worth, TX.

Financial Management . Autumn 2008 . pages 413 - 430

414 FinancialManagement *Autumn 2008
find that the amount of debt issued is substantially higher when interest rates are low relative
to historical levels. We also find that issuance depends not just on the absolute level of interest
rates, but also on their recent history. Thus, not only the levels, but also the changes in the level
of interest rates, seem to affect managers' issuance decisions.
When interest rates are low, there can also be greater incentives to issue equity or to increase
the level of capital expenditures. Therefore, we examine
the ratio of debt issuance to the sum
of debt and equity issuance, and the ratio of debt issuance to capital expenditures. Both ratios
increase when interest rates are low relative to recent history.
Since refinancing is natural when interest rates fall and could account for the increased issuance
when rates are low, we also examine the results after we account for refinancings. We find that
our conclusions continue to hold even when we exclude refinancings.
When we disaggregate the data, we find some evidence that firms with fewer financial con
straints exhibit more evidence of timing debt issues than do more constrained firms. Larger firms
appear to be more able or willing than smaller firms to issue when rates are relatively low. The
same is true for firms with high, compared to low, free cash flow and for more profitable firms
compared to less profitable firms. Conversely, firms with higher capital expenditures are less
sensitive to the effect of historical rates than are firms with lower capital expenditures.
Managers appear to consider the history of recent interest rates when deciding to issue debt.
Regardless of whether or not such considerations actually lower the cost of debt capital, which is
a subject of an ongoing debate, they appear to affect corporate financial policy. This observation
suggests that they should be considered more prominently in capital structure investigations.
The paper proceeds as follows. Section I summarizes our data. Section II presents our empirical
results, and Section III concludes the paper.

1.Data and Sample Characteristics

Our study period is January 1970 to April 2001. For this period we obtain data for new,
nonconvertible,public debt issues fromThomsonFinancial'sSecuritiesDepository Center (SDC)
new issues database. There are 85,724 debt issues during this period. We obtain data on the issue
date, the identity, and characteristics of the borrower (such as industry and nationality); and
various characteristics of the bond issue, such as proceeds in nominal dollars, maturity, yield to
maturity (YTM) at issuance, credit rating, whether the issue is floating or fixed rate, and whether
it is callable or puttable. We adjust the nominal proceeds with themonthly consumer price index
(CPI) to obtain proceeds in constant dollars (measured as of January 1, 2001) so that we can
make valid comparisons of the quantities issued across time. We exclude issues by non-US firms,
issues outside of the United States, issues by firms in Standard Industrial Classification (SIC)
codes 6000-6999 (financialcompanies)or 9000-9999 (government-related),issuesby nonprofit
organizations (such as churches or universities), and issues that are components of derivative
instruments. Those screens reduce the number of issues with available issuance data to 14,623.
We also obtain study-period data for equity issues in the US public markets from the SDC. We
exclude initial public offers and then apply the same exclusion criteria as described above for
debt issues. After applying these screens, we have 10,209 equity issues.
In addition to data on new issues, we obtain interest rate, inflation, and interest rate spread
data. We obtain time series of the monthly yields on Treasury and corporate bonds with various
maturities and on inflation rates, measured from the CPI, from the Federal Reserve Bank of Saint
Louis's FRED database. These include the 90-day Treasury-bill yield (denoted as T-bill 90), the
10-year constant maturity Treasury yield, and the Baa corporate yield. We measure the term
Barry,Mann, Mihov, & Rodr[guez *Corporate Debt Issuance 415
spread as the difference between the 10-year constant maturity Treasury yield and the T-bill 90
yield, and we measure the default spread as the difference between the Baa yield and the 10-year
constantmaturityTreasuryyield.
We also obtain Compustat data for the issuers. We obtain firm Compustat data for 9,614 of
the 14,623 issues, or approximately two-thirds of our issuance sample. For some of our tests, we
obtain firm-level data on capital expenditures (Compustat data item 128). For each debt-issuing
firm, we aggregate the annual amount of debt issued (from the SDC) and scale it by annual capital
expenditures. The number of observations in our firm-level tests varies due to the availability of
different data items. We also collect data that characterize (in the aggregate) the stock market,
such as the price-earnings ratio and market-to-book value ratio of the S&P 500 index (from CRSP
andCompustat).
In Figure 1, Panel A shows the patterns of the SDC's monthly debt issuance. Panel B shows the
Compustat annual net debt issuance compared tomean monthly Baa yields. Compustat debt data
include bank debt, which firms could use as a substitute for public debt. We calculate Compustat
net debt issues, which we obtain from the cash flow statement, as data item 111 (issuance of
long-termdebt)minus data item 114 (reductionin long-termdebt).We measureCompustatgross
debt issuance as data item 111. We use the CPI to convert the dollar amounts into January 2001
dollars. For ease of comparison, we divide annual Compustat issuance by 12 to show the average
monthly issuance.We exclude financial firms and foreign issuerson Compustat.
Both panels 1 show that debt issuance tends to increase when interest rates drop.
in Figure
When we compare the panels, Panel A shows considerable within-year variations in yields and
debt issuance, thus confirming the benefit of using monthly data to examine timing attempts.
The correlation between the annualized SDC debt issuance and annual Compustat net (gross)
debt issued is 35% (78%), and the correlation between the annualized SDC debt issuance and the
annualized Baa yield series is -54%. In comparison, the correlation between the Baa yield and
the Compustat net (gross) issuance is -18% (-47%).
Table I provides stylized facts about debt issuance and shows yields on issued debt, Treasury
bills, and 10-year Treasury securities over the sample period. Measured in January 2001 dollars,
the total amount of debt issued in our sample is $2.60 trillion. The largest dollar amount of issues
in a single year is $182 billion in 1993, which coincides with the second largest number of issues
(1,049). The year 1993 shows the lowest median level of short-term rates (measured by T-bill
90s) and the fourth lowest median level of long-term rates (measured by 10-year Treasuries)
across the 32 years of our sample. When we exclude 2001, for which we use only five months of
issuance data, the smallest annual amount raised ($28 billion) and fifth smallest number of issues
(221) occur in 1983, when median short-term rates and long-term rates are at their sixth and fifth
highest levels, respectively,across the sample.
Table I shows the ratio of debt issued to the sum of debt and seasoned equity offerings (SEOs).
The lowest mean and median values of the ratio occur in 1983, the year that also has theminimum
amount of total debt issuance. The highest ratios occur in 1988 and 1989.
Table I also provides an overview of the fraction of issues that were callable or puttable across
time. As noted above, we do not report data on callable or puttable debt prior to 1976, since the
SDC did not consistently report those features prior to 1976. Overall, about 42% of the issues were
callable. Callability was very common prior to the 1990s, and was used in an average of more than
75% of all debt issues. Since 1990, the callability has averaged less than 25% of the debt issues.
The year 1981 has themaximum callability level in our sample (88.5%), the same year for which
our data show themaximum yields on debt issues. This finding shows thatwhen the cost of debt
is highest, the greatest percentage of callable debt is issued. Callability provides companies with
the ability to reduce the effective maturity of their debt issues at the highest interest rate levels.
 416 FinancialManagement.- Autumn 2008

Figure 1. Monthly Debt Issuance Proceeds and Baa Yields: SDC Compared to
Compustat
Panel A shows the monthly amounts issued (right axis) for a sample of 14,623 public debt issues by US
nonfinancial firms from January 1970 through April 200 1. Panel B shows average monthly net debt issue
proceeds by US nonfinancial firms from January 1971 through December 2000. We measure dollar amounts
in millions of constant (January 2001) dollars. The Baa yields are shown as lines. The proceeds are shown
as bars.

Panel A: SDC Monthly Debt Issue Proceeds Compared toBaa Yields

20 -30,000

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 & Rodr[guez - Debt Issuance 417
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Barry,Mann, Mihov, & Rodr[guez *Corporate Debt Issuance 419
We also examine the relation between call features and interest rate levels. The correlations
between callability and the yields on T-bills, 10-year Treasury bonds, and Baa debt are 61%,
69%, and 68%, respectively. We also measure the correlation between the fraction of proceeds
that are callable and interest rate volatility, defined as the standard deviation of the yields on
Baa-rated debt over 12, 36, and 60 months prior to issuance. The correlations are 40%, 57%,
and 60%, respectively. In unreported multivariate analyses, we regress the fraction of proceeds
that are callable on interest rates, interest rate volatility, time dummies, and control variables. We
then confirm the positive relation between callables and interest rates and rate volatility and the
secular trend toward a decline in callables.
About 8% of the overall debt issues include put provisions, and a similar percentage of issues
have floating rates (not reported). The period prior to 1989 shows very small percentages of
puttable debt issues. During the peak interest rate year (1981), just over 1% of debt issues include
put options. The year 1994 was a year in which the interest rates of debt issues were at about
one-half the level for 1981. Thus, the 1994 issues have the maximum percentage of put options
(21.5%). Despite the relatively low interest rates during the latter few years of our sample, the
years following 1994 show sharply lessened levels of put options.

II. Interest Rate Levels and Debt Issuance

Many factors affect the decisions by companies to issue new debt and the features they select
for the debt.' Graham and Harvey (2001) find that managers are interested in the current levels
of interest rates relative to historical rates. They describe the finding as follows: "We inquire
whether executives attempt to time interest rates by issuing debt when they feel that market
interest rates are particularly low." They provide " . . moderately
. strong evidence that firms try
to time the market in this sense."2 We examine the extent to which debt issues are associated
with the level of interest rates relative to historical levels, and we account for financing needs
and capital expenditures. Graham and Harvey also find that " . . market . timing is especially
important for large firms," an item that we examine in addition to other characteristics of issuing
firms. Bancel and Mittoo (2004) find similar results from their survey of European financial
managers. Other studies that suggest timing considerations might affect debt decisions include
Taggart (1977), Marsh (1982), and Faulkender (2005).

A. Interest Rate Levels and Historical Rates

We construct two measures of historical interest rates. The first measure identifies the decile
ranking of current interest rates against rates over the previous 10 years. The first decile refers
to rates that were below the 10th percentile of average monthly rates in the prior 10 years. The
second decile pertains to those rates from the 10th percentile to below the 20th percentile, and
so on. Like Graham and Harvey (2001), we also refer to the rates as "low" if they are in one of

Studies that examine factors related to decisions to issue debt include Fisher (1930), Myers (1977), Myers and Majluf
(1984), Diamond (1991), Barclay and Smith (1995), Guedes and Opler (1996), Hoven and Mauer (1996), Jung, Kim, and
Stulz (1996), Houston and James (1996), Hovakimian, Opler, and Titman (2001), and Brounen, de Jong, and Koedijk
(2004), among others.
2
John Graham explained in private communication with us on this topic that although CFOs in the Graham and Harvey
(2001) survey were not explicit about what "particularly low" meant to them, itwas his interpretation, based in part on
his conversations with the executives who responded to their survey, that they were referring to current interest rates
compared to their historical levels.
420 FinancialManagement -Autumn 2008

the bottom as "high" if they are in one of the top three deciles, and "medium" for
three deciles,
rates in the middle deciles. A given interest rate could be high or low relative to historical rates.
For example, each of the 10-year constant maturity Treasury rates from 5% to 9% are relatively
low rates in some periods and relatively high rates in other periods. A manager who faces a 10%
cost of new debt might be more willing to issue debt at that rate if it is among the lowest rates in
recentmemory.
Our second method of accounting for historical rates is to use the lagged values of interest
rates, in addition to their current value.
Figure 2 illustrates the point using quintiles of current interest rates relative to historical levels.3
Panel A shows the average monthly SDC debt issue proceeds across quintiles of monthly average
Baa yields. We define 1 as the lowest quintile and 5 as the highest. Clearly, more debt is issued
when yields are lower.
Panel A also shows the average monthly proceeds across yield differential quintiles. We identify
yield differential quintiles based on the difference between the current month's Baa yield and the
average yield over the prior 10 years. Thus, quintile 1 represents the lowest differential. More
debt is issued when yields are low as well as when they are low compared to the average yield
over the prior 10 years.
Panel B of Figure 2 illustrates both the level effect (the raw yield level) and the change effect
(the deviation from the past 10-year average) by using a two-way sort to compare the average
monthly proceeds against the quintiles of monthly yields and yield differentials.For example,
Panel B shows that the highest amount of debt issues occurs when yields are low and the 10-year
yield differentials are also low. Panel B shows that both the level of the yield and the 10-year
yield differential appear to affect issuance. Proceeds are generally highest inmonths in which
rates are lower than the prior 10-year average. Thus, Panel B demonstrates a tendency toward
debt issuance when interest rates are low relative to prior levels.
We note that several of the two-way sort categories have no observations. For example, there
are no months in which the yield is at the highest-level quintile and also at the lowest quintile
of the 10-year yield differential. Similarly, there are no months with lowest-quintile yields but
highest-quintile 10-year yield differentials.

B. Debt Issuance, Interest Rates, Spreads, and Growth

Table II provides ordinary least squares (OLS) tests that incorporate a number of variables that
might affect debt issuance. These variables include interest rates (either 10-year constant maturity
Treasury rates or Baa rates), rate deciles (relative to historical rates), credit and term spreads,
and price-earnings and market-to-book ratios, factors that indicate market growth. In half of the
regressions, instead of interest rate deciles, we use five-year and 10-year lagged rates.
We are concerned that debt issuance might occur not because of low rates relative to historical
levels, but because of attractive credit spreads and term spreads. Thus, the regressions in Table II
incorporate such spreads. The term spreads, which we measure as the difference between 90-day
T-bills and 10-year Treasuries, are not significantly associated with debt issuance. Credit spreads,
which we measure as the difference between the 10-year constant maturity Treasury rates and
Baa rates, are significantly and positively associated with debt issuance. This finding indicates
higher credit spreads during periods of high issuance. The positive association is not consistent
with attempts to time the credit spread, but it is consistent with timing the level of rates. Unless
the demand to purchase debt issues increases along with the increased supply of debt issues at low

3
We thank an anonymous referee for suggesting the figure.
Barry,Mann, Mihov, & Rodriguez . Corporate Debt Issuance 421
Figure 2. Average SDC Monthly Issuance Proceeds across Yield Deciles
and Yield Differential Deciles

Panel A shows average monthly proceeds across quintiles of monthly average Baa yields, and quintiles of
Baa yield differentials (monthly yield less average yield over the prior 10 years) for the years 1970-2001.
Panel B provides a two-way sort of the yield quintiles and the yield differential quintiles.

Panel A. Average Monthly Issuance Proceeds Across Baa Yield Quintiles

& Baa J0-Year Yield Differential Quintiles, 1970-2001 ($millions)
12,000

r Proceeds forYield Quintles

10,000 |o Proceeds for 10-Year Yield Differential Quintiles

8,000

(4
?
0
=6,000

4,000

2,000

0
1 2 3 4 5
Quintiles of Baa Yields and Baa 10-Year Yield Differentials, 1970-2001 (I =lowest)

Panel B. Average Monthly Issuance Proceeds by Two-Way (5x5) Sort

(Baa Yield and Yield Differential Quintiles, I =lowestfor both)

16,000
- * Baa-mean Ql
14,000 * Baa-mean Q2

12,000 - * Baa-mean Q3
El Baa-mean Q4
10,000 - El
Baa-mean Q5

-8,000

5* -
6,000

4,000

2,000 ILi
Q1 Q2 Q3 Q4 Q5
Baa Yield Quintile
422 FinancialManagement . Autumn 2008
Table II.Debt Issued across Relative Rates and Growth Measures

This table presents OLS tests of themonthly amount of debt issued (Panel A), the ratio of debt to secondary
equity offers (SEOs) (Panel B), and the firm-level ratio of the annual amount of debt issued to the annual
capital expenditures (Panel C) as a function of the historical distribution of interest rates, interest rate levels,
and control variables. The sample consists of 14,623 public straight debt issues and 10,209 SEOs by US
nonfinancial firms during 1970-2001. Amounts are inmillions of constant (January 2001) dollars. We
measure all independent variables as of themonth immediately preceding themonth of issuance. Baa is
theMoody's Seasoned Baa Corporate Bond Yield. The Baa decile is the decile rating of the rate at the
time of issuance among rates over the prior 10 years. We define term spread as the difference between
the 10-year Treasury constant maturity rate and the yield on 90-day T-bills. We define credit spread as the
difference between Baa and 10-year Treasury constant maturity rate. Parameter estimates show p-values
in parentheses. In Panel C, for each firm-year, we calculate the annual amount of debt issued reported by
Thomson Financial. We then form the ratio of annual amount of debt issued to annual capital expenditures
(Compustat item 128). We measure the independent variables as of the end of the year of issuance.

Panel A. Amount Issued per Month in 2001 Constant Dollars

Intercept 3,018.4** (0.033) 5,174.7*** (0.000) -250.3 (0.854)

Baa decile -360.9*** (0.000) -41 1.0*** (0.000)
Level of Baa at -257.5** (0.014) -397.9*** (0.000) -550.4*** (0.000)
issuance, %
Credit spread 2,336.8*** (0.000) 2,754.5*** (0.000) 2,471.7*** (0.000)
Term spread -263.8* (0.057) -100.8 (0.497) -278.1** (0.040)
S&P 500 P/E ratio 249.4*** (0.000) 241.6*** (0.000)
S&P 500 market/book ratio 1,179.1 (0.000)
Baa lagged 60 months 180.0** (0.018)
Baa lagged 120 months 286.8*** (0.000)
Adjusted R2 0.48 0.464 0.497
Number of observations 375 375 375

Panel B. Proportion of Debt Issued to Total Issues (Debt Plus SEOs)

Intercept 1.115*** (0.000) 1.111*** (0.000) 0.901*** (0.000)

Baa decile -0.017*** (0.000) -0.018*** (0.000)
Level of Baa at issuance, % -0.018*** (0.000) -0.017*** (0.000) -0.030*** (0.000)
Credit spread 0.031* (0.071) 0.024 (0.126) 0.018 (0.280)
Term spread -0.004 (0.568) -0.014** (0.027) -0.003 (0.619)
S&P 500 P/E ratio -0.010*** (0.000) -0.007*** (0.000)
S&P 500 market/book ratio -0.070*** (0.000)
Baa lagged 0.021*** (0.000)
60 months
Baa lagged 0.003 (0.330)
120 months
Adjusted R2 0.114 0.137 0.179
Number of observations 375 375 375
Barry,Mann, Mihov, & Rodriguez . Corporate Debt Issuance 423
Table 11.Debt Issued across Relative Rates and Growth Measures (Continued)

Panel C. Firm-Level Ratio of Debt Issued Divided by Capital Expenditures

Intercept 3.610*** (0.000) 3.234*** (0.000) 1.149** (0.031)

Baa decile -0.022*** (0.000) -0.019*** (0.000)
Level of Baa at -0.037 (0.391) -0.012 (0.783) -0.156*** (0.000)
issuance, %
Credit spread 0.173 (0.216) 0.004 (0.977) -0.251* (0.085)
Term spread 0.068 (0.133) 0.036 (0.445) 0.127*** (0.004)
S&P 500 P/E ratio -0.057*** (0.000) 0.018 (0.239)
S&P 500 -0.245*** (0.002)
market/book ratio
Baa lagged 0.258*** (0.000)
60 months
Baa lagged -0.033 (0.277)
120 months
Adjusted R2 0.021 0.020 0.029
Number of 4,314 4,314 4,314
observations

***Significant at the 0.01 level.

**Significant at the 0.05 level.
*Significant at the 0.10 level.

rates, then during periods of high supply relative to demand, the demand and supply interaction
should lead to lower relative bond prices and thus to higher credit spreads.
A second concern on the apparent relation between issuance and relative interest rates is that
low relative interestratesmight also reflect high contemporaneouslevels of corporategrowth
expectations. Such a result would be consistent with the neoclassical theory of investment, since
increased investment could be a natural part of the growth expectations. To account for the
possibility of such effects, in Table II we include two measures that characterize market-wide
growth expectations, the price-earnings (P/E) ratio, and the market price-to-book value ratio
(M/B) for the S&P 500 index.
Even after we incorporate the spread and growth variables, the historical interest rate deciles
remain highly significant. The highest levels of debt issuance occur when growth proxies are high
and interest rates are historically low. The lowest levels of debt issuance occur when rates are
high and expected growth is low. Therefore, the effects of relative interest rates on debt issuance
remain even after we account for the effect of expected overall economic growth.
Variation in rates affects issuance in an economically meaningful way. For example, Panel A
of Table I indicates that if the decile rank of the relative rate increases by 1, on average, issuance
decreases by $361 million in a month. For comparison, if the rate itself increases by 1%, the
amount issued in amonth decreases by $257 million.
In Table II, the panels extend the regressions to utilize historical rate lags instead of the deciles
of current rates relative to historical rates. The five- and 10-year lagged rates are positive and
significant in each regression. The current level of 10-year constant maturity Treasury rates and
Baa rates at the time of issuance remain negative and significant. Therefore, whether we measure
interest rates as deciles relative to historical rates or whether we use lagged rates, we see that they
significantly affect debt issuance.
424 FinancialManagement *Autumn 2008
In an untabulated analysis (available on request), we also investigate the horizon of relevant rate
changes. We do not have a strict theoretical justification for choosing the 10-year horizon over
which we calculate the decile ranking of interest rates relative to past rates (our first measure).
The relevant horizon should reflect the "memory" of the decision maker for the history of interest
rates. For example, one proxy for the length of the decision maker's "memory" could be the tenure
of the CEO or the CFO. Therefore, we examine amodel with the current Baa rate and its lagged
value plus control variables, where the lags range from one year to 20 years. The lagged rate is
positive and significant as early as three years back and as far back as 19 years, with the adjusted
R2 and the t-value of the lagged variable maximized at 11 years.

C. Debt Issuance as a Proportion of Total Issuance

An important question iswhether the effect is a case of issuing debt to time the interest rates,
or if it is a case of raising funds in general. For example, Burch, Christie, and Nanda (2004)
specifically examine whether firms time equity offerings. In Panel B of Table II,we examine the
issuance of debt and equity and calculate the ratio of debt issued to the sum of debt and equity
issued. The equity issues are in the form of SEOs that, like public debt issues, are reported in the
SDC. As noted earlier, during the period of our study we find more than 14,000 debt issues and
10,000 equity issues. The question iswhether the ratio of the amount of debt issued to the total
amount of debt and equity issued increases as interest rates become lower relative to historical
levels. If so, interest rates relative to historical rates do specifically affect debt issuance, not just
total firm issuance of new funding.
The results in Panel B of Table II demonstrate significantly higher debt-to-total issuance as a
function of lower deciles of current rates relative to historical rates or higher lagged interest rates.
The rate deciles remain highly significant, as do the five-year lagged rates, although the 10-year
lagged rates do not. The results hold whether we use 10-year Treasuries or Baa rates. The levels
of interest rates also continue to hold strongly.
Thus, even if more attractive economic conditions do attract equity issuance, the amount of
debt issuance relative to the total of debt and equity issuance is still greater when interest rates
are lower relative to historical rates. These results remain consistent with the survey results in
Graham and Harvey (2001).

D. Debt Timing and Capital Expenditures

When interest rates decline to relatively low levels, the net present value of some capital
investment projects may become positive because of the lower discount rate. Thus, what we
observe may not be debt timing per se, but the result of firms issuing debt because of increased
opportunitiesfor capital spending.
We measure debt issuance relative to capital expenditures and examine the impact of changes
in rates on this ratio. We obtain data on capital expenditures from Compustat (item 128). For
each firm-year within our SDC sample for which the capital expenditure data are available from
Compustat, we calculate the annual amount of SDC debt issued and divide it by the annual amount
of capital expenditures. We exclude the extreme top 1% of the observations, limiting the ratio to
a range of 0 to 38.4. The resulting sample size is 4,313 firm-years. We then regress the ratio of
the quantity of debt issued divided by capital expenditures of each of the issuing firms on the
interest rate level, interest rate deciles, or lagged interest rates, and control measures.
Panel C in Table II presents the results of regressions with a dependent variable equal to
the quantity of debt issued divided by capital expenditures of the issuing firms. The historical
decile ranks of current interest rates are strongly associated with the ratio of debt issued to
Barry,Mann, Mihov, & Rodriguez . Corporate Debt Issuance 425
capital expenditures. The lagged historical rates with a five-year lag remain significant, and, as
in Panel B, the 10-year lags are not significant. Unlike the previous tests, the current level of
interestrates(asopposed to itshistoricaldecile) does not remainsignificantwhen we includethe
historical ratedeciles, but theydo remainsignificantwhen we use laggedhistorical rates instead.
The results of Panel C in Table II further illustrate that debt timing, based on the current rates
relative to historicalrates, remains significant and is not caused merely by the need for capital
expenditures. This evidence of timing is a noteworthy result, since the neoclassical theory of
investmentsuggests increasedcapital expenditureswhen the cost of capital is low.Although in
creased expenditures do occur, they do not fully account for the quantity of debt issued. To account
for the potential impact of interest rate persistence, we re-estimate the regressions in Table II
by using a first-orderautoregressiveerrormodel. The autoregressiveresultsproduce lower re
gressionR2 and lower t-valuesfor the independentvariables.However, theoverall inferenceson
the relation between issuance and historical rates are consistent with those we find when we use
OLS, in that the coefficients and the significance of the relative rate variables remain qualitatively
similar. For example, in the first model specification in Panel A of Table II, the coefficient on the
Baa decile variable changes from -360.91, with a t-value of -5.30 and ap-value less than 0.0001,
to -284.62 with a t-value of -2.89 and a p-value of 0.004. The R2 of the autoregressive model is
0.56 (including the autoregressive term), and 0.29 for the original regressors, compared to 0.48
in the original model. When we use second- or third-order autoregressive models, the variable
remains significant and has a coefficient of similar magnitude.

E. Debt Timing, Refinancing, and Net Stock Issuance

The timing of debt issuance relative to historical rates can be influenced by the desire to
refinance expensive existing debt. Therefore, we examine the robustness of the interest rate
timing results with respect to the use of the proceeds. We also study the effects of net stock
repurchases compared to net stock issuance, since repurchases could represent another type of
refinancing. If firms issue new debt to retire expensive existing debt, then that decision might
be driven entirely by the potential for reducing the cost of existing debt rather than for the
issuance of further debt. Therefore, we divide our sample into subsets of firms that are net issuers
of debt compared to firms that apparently use the proceeds to refinance existing debt. Since
share repurchases can also be a form of refinancing, we break the samples into those with debt
refinancing that do or do not make net share repurchases.
We calculate the net issuance of debt for each firm in each fiscal year as the difference between
the amount of debt issued (Compustat item 111) and the amount of debt retired (Compustat
item 114). We then divide firms into a net issuers subsample if the difference is positive, and
a refinancing subsample if the difference is 0 or negative. We present our results in Panel A of
Table III.
Panel A of Table III documents the significant effects of relative interest rates in both the
refinancing subsample and the net issuers subsample. Refinancing is strongly associated with the
relative levels of interest rates compared to historical levels (measured, again, by low, medium,
or high deciles). Nevertheless, even when there is no refinancing, there continues to be a sig
nificant association between debt issuance and the historical decile levels of current interest
rates.
We further split the net issuers into firms that use some of the proceeds for refinancing and
firms whose net debt increases by more than the amount of the public debt issued, indicating
that in addition to issuing public debt, those firms borrow from other sources. Once again,
although it appears that there ismore timing by the firms that use at least part of the proceeds for
426 FinancialManagement . Autumn 2008
Table Ill.Timing of Net Issues versus Refinancings

The table presents comparisons of the timing of net debt issues and debt refinancings. Panels A and B show
themonthly amount of debt issued across historical interest rate deciles and use of proceeds. The amount
issued is inmillions of constant (January 2001) dollars. "Low" indicates that theBaa rate falls into the lowest
three deciles of relative rates in the preceding 10 years. "Medium" indicates that the rate falls into deciles
four to seven. "High" indicates that the rate falls into the highest three deciles. We use Compustat data to
classify issues as debt refinancings if the net amount of debt by the firm for the fiscal year is negative, and
otherwise classify issues as net debt issues. Among the net debt issues, we classify those cases inwhich the
net debt was lower than the annual amount issued as "some refinancing." We use Compustat data to further
classify debt issues by net stock repurchasers if the net amount of stock issued by the firm for the fiscal year
is negative, and otherwise classify issues as net stock issuers.We present in parentheses t-statistics for the
test that themean in category "Low" is equal to themean in category "High."

Panel A. Net Debt Issues Compared toRefinancings

Relative Category of the Baa Rate Debt Net Debt Issuers, Net Debt
Refinancing Some Refinancing Issuers
Low 1,396.7 2,876.0 1,424.7
Medium 504.2 1,654.5 1,245.2
High 92.1 1,082.5 564.9
t-test: Low compared to high (1 1.57)*** (10.02)*** (7.93)***

Panel B. Net Debt and Stock Issues Compared toRefinancings

Relative Category Debt Net Debt Issuers, Net Debt

of the Baa Rate Refinancing Some Refinancing Issuers

Negative Positive Negative Positive Negative Positive

Stock Stock Stock Stock Stock Stock
Issuance Issuance Issuance Issuance Issuance Issuance
Low 848.7 418.1 1,542.6 1,098.43 734.6 519.1
Medium 264.8 183.1 861.0 698.0 719.9 464.9
High 38.2 48.4 320.3 733.7 175.1 380.3
t-test: Low compared to high (10.83)*** (7.87)*** (12.76)*** (3.41)*** (7.80)*** (2.5 1)**

***Significant at the 0.01 level.

**Significant at the 0.05 level.
*Significant at the 0.10 level.

refinancing, there continues to be significant timing by the firms that use all of their proceeds as
new financing. Therefore, consistent with the evidence discussed earlier, the results continue to
show that whether or not refinancing is a part of their debt issuance decision, managers tend to
issue more debt when interest rates are at low levels relative to historical rates.
We also break each of the three debt samples into subsamples with positive or negative net
stock issuance. We calculate the net issuance of common and preferred stock for each firm in
each fiscal year as the difference between the amount of stock issued (Compustat item 108) and
the amount of stock repurchased (Compustat item 1 5). The results from this further subsampling
are presented in Panel B of Table III.Our results for historically based debt timing remain robust
across the stock issuance categories. In all cases, the evidence supports the hypothesis that the
amount of debt issuance depends on where interest rates are relative to historical levels.
We also perform multivariate regressions, using the same structure and the same explanatory
variables as those reported in Table Il. In these regressions we redefine the dependent variable
Barry,Mann, Mihov, & Rodriguez *Corporate Debt Issuance 427

to be the aggregate monthly ratio of net debt to the sum of net debt and equity issued. This
specification requires the assumption that annual net equity issuance and net debt issuance are
evenly distributed across the months of the fiscal year. We define net long-term debt issuance
as the minimum of either the total annual SDC debt issues or the increase in (annually reported)
Compustat debt, thus eliminating all potential refinancing from the sample. We allocate each
firm's net annual debt increase tomonths by using each firm's monthly proportion of its annual
issuance. We then allocate net equity issuance, which is available only annually, to months by
assuming that the issuance of net equity during the year is on the same monthly schedule as debt
issuance.
The untabulatedresults (availableon request) strongly support the results in Table II.
When
current rates are low relative to historical rates, companies issue a significantly higher proportion
of net debt compared to net equity. For example, for the specification that uses the level of the Baa
yield, the Baa decile, the credit spread, the term spread, and the S&P 500 P/E ratio as dependent
variables, the adjusted R2 is 0.074, and the coefficient on the Baa decile is -0.006 with a t-value
of 2.97, and a p-value of 0.003. The results are similar for the rest of the specifications.

F. Corporate Characteristics, Debt Issuance, and Interest Rates

Graham and Harvey (2001) report that managers of larger firms tend to attempt interest rate
timing more than do the managers of smaller firms. There can be other characteristics of firms
that also influence the tendency to time debt issuance based on relative interest rates. For example,
firms with greater financial flexibility may be better able to time their issuance than can firms that
are financially constrained, either due to lower cash flows or large investment intensity.
In Table IV we consider the effects of corporate profitability, the amount of free cash flow after
funding investments (scaled by total assets), and the intensity of capital expenditures upon the
tendency to issue debt. Table IV presents regression results based on the comparisons of large
firms comparedto small firms, highly profitable firms compared to less profitable firms, firms
with high free cash flow compared to firms with low free cash flow, and firms with high capital
expenditures compared to firms with low capital expenditures. In each of the paired subsamples,
we break the samples into the upper and lower half of firms relative to themedian of the variable
of interest.
The results in Table IV show that for all the cases we examine, the level of interest rates
measured as deciles based on historical rates is consistently significant in determining debt
issuance. Small firms and large firms both issue more debt when the rate decile is lower. The rate
coefficient ismore negative for larger firms, indicating that larger firms are more able or willing
to issue when rates are relatively low. Highly profitable firms and less profitable firms all issue
more debt when rates are historically lower, although, like the results for larger firms, the more
profitable firms show stronger negative coefficients than do the less profitable firms. The same
pattern holds for firms with high compared to low free cash flow. Conversely, firms with higher
capital expenditures are less responsive towhere interest rates are relative to historical rates than
are firms with lower capital expenditures.
We test for the differences in coefficients across firm types. We pool the subsamples to combine
firm types and add interactive variables consisting of each dependent variable multiplied by a
dummy variable for the firm type. We then examine the significance of the coefficients on the
interactiveterms.
The coefficient for the large firm dummy (set equal to 1 for large firms) times the Baa decile
variable is -109.3 with a t-value of -2.64 and p-value of 0.009. Thus, issuance of debt by large
firms ismore sensitive to the relative level of interest than is small firm issuance. The coefficient
 428 Financial Management *Autumn 2008

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Barry,Mann, Mihov, & Rodriguez . Corporate Debt Issuance 429
for the more profitable firm dummy (set equal to 1 for more profitable firms) times the Baa
decile variable is -94.5 with a t-value of -2.47 andp-value of 0.014. This result shows thatmore
profitable firms exhibitmore timing thando less profitable firms.The coefficient for thehigher
capital expenditure firm dummy (set equal to 1 for high capital expenditure firms) times the Baa
decile variable is 124.3 with a t-value of 3.01 and a p-value of 0.003, showing that firms with
higher capital expendituresexhibit less timing thando firmswith lower capital expenditures.
Finally, the coefficient for the greater free cash flow firm dummy (set equal to 1 for high free cash
flow firms) times the Baa decile variable is -75.3 with a t-value of 1.82 and a p-value of 0.069,
showing that firms with higher free cash flow exhibit more timing than do firms with lower free
cash flow. Thus, it appears that larger firms and firms with less financial constraints are more
likely to attempt to time debt markets.

Ill.Conclusion

We examine whether the timing of debt issuance is affected by the current level of interest rates
relative to historical rates, after we have accounted for total financing and capital expenditures.
While controlling for other factors that affect the issuance decision, we examine empirically
whether corporate managers time the issuance of external debt with respect to interest rates. We
find that debt issuance activity is very much affected by the level of interest rates relative to
historical rates.
Our results on debt issuance are consistent with the survey results on debt timing in Graham
and Harvey (2001) and Bancel and Mittoo (2004). Like these two studies, our results indicate
that financial managers try to issue debt when rates are "particularly low" if the interpretation of
"particularly low" is low relative to previous levels. We show that debt issuance, measured by total
amount issued and number of issues of new debt, relates to the relative level of interest rates in
comparison to their historical values over the prior 10 years and/or by the lagged historical levels.
Our evidence indicates that debt issuance as a proportion of total capital issuance (including
equity) reflects timing effects, and that debt issuance relative to capital expenditures also reflects
timing.
We find strong evidence that the amount of debt issued and the number of debt issues are
related, both to the absolute level of interest rates and to their levels relative to historical rates.
After controlling for other market conditions or corporate characteristics that can affect issuance,
we find that the firms in our sample issue significantly higher amounts of long-term debt when
long-term interest rates are low in either absolute or relative terms.
When interest rates decline, companies tend to refinance past debt that is eligible for refinanc
ing. Therefore, we also consider the effects of refinancing transactions on debt issuance related to
levels of interest rates. We find that refinancing ismore common in our sample when interest rates
are at low levels relative to their history. Even when we focus on the non-refinancing transactions,
we still find that debt issuance is significantly greater when relative interest rate levels are low.
Thus, debt timing is not merely driven by refinancing.E

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