Most of the capital structure literature focuses on demand-side factors, assuming implicitly that supply-side constraints have little effect on capital structure decisions. For example, the trade off theory states that each firm chooses its optimal capital structure by comparing its costs and benefits of issuing new debt, assuming that the supply of capital is infinitely elastic.
Faulkender and Petersen (2006) argue that this is a strong assumption because market frictions, such as asymmetric information and agency costs, that make capital structure relevant could also be associated with a firm’s source of capital. They show that U.S. firms with public bond market access, as measured by having a credit rating, have about six to eight percentage points higher debt ratios than firms without access, after controlling for demand-side factors.