The frequency with which firms adjust output prices to aggregate and idiosyncratic shocks helps explain persistent differences in capital structure across firms. Unconditionally, the most flexible-price firms have a 19% higher long-term leverage ratio than the most sticky-price firms, controlling for known determinants of capital structure. Sticky-price firms increased leverage more than flexible-price firms following the staggered implementation of bank deregulation across states and over time, which we use in a difference-in-differences strategy. Firms' frequency of price adjustment did not change around the deregulation. In his talk, Weber provides an empirical link between credit constraints and price rigidity as the two drivers of aggregate fluctuations and explains their effect on firms' leverage choices.

Keywords:
Capital Structure, Nominal Rigidities, Bank Deregulation, Industrial Organization and Finance, Price Setting, Bankruptcy