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Access to Capital, Capital Structure, and the Funding of the Firm



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    • Omer Brav is currently employed at Paulson & Co. Inc. This paper is based on my PhD dissertation at the Wharton Business School. An earlier draft of this paper was circulated under the title “How Does Access to the Public Capital Market Affect Firms’ Capital Structure?” I would like to thank Alon Brav, Brian Bushee, Yingjin Gan, Mitch Gouss, Richard Herring, David Musto, Michael Roberts, Oded Sarig, Robert Stambaugh (the editor), Ayako Yasuda, and two anonymous referees for valuable feedback. I owe special thanks to Andrew Metrick for his guidance and support. Comments and suggestions from seminar participants at Cornell University, Emory University, and Wharton School are gratefully acknowledged. All remaining errors are mine. The opinions in this paper represent my own views and not necessarily the views of Paulson & Co. Inc., nor any of its affiliates or employees.


Based upon a large data set of public and private firms in the United Kingdom, I find that compared to their public counterparts, private firms rely almost exclusively on debt financing, have higher leverage ratios, and tend to avoid external capital markets, leading to a greater sensitivity of their capital structures to fluctuations in performance. I argue that these differences are due to private equity being more costly than public equity. I further examine the private firms subsample to show that private equity is more costly than its public counterpart due to information asymmetry and the desire to maintain control.

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