The impact of interest rate volatility on the leverage choices of S&P500 US-listed firms

Abstract

This thesis examines how interest rate volatility affects the borrowing decisions of S&P500 listed companies. The study includes data from 205 S&P 500 companies from 2000 to 2023 in order to explore how interest rate volatility impacts capital structure decisions. By using panel data regression models, it analyzes both long-term and short- term interest rate changes, along with firm-specific factors, to understand leverage decisions during a 24-year period. The results show that interest rate volatility has a big impact on leverage, especially long-term, which discourages borrowing due to financial risks. Firm-specific factors like cash flow strength, size, and market-to-book ratios play a key role in shaping borrowing strategies. Industry-specific differences matter less overall, though Technology and Telecommunications firms are more likely to reduce leverage when faced with long-term volatility. This is probably because these sectors rely on intangible assets and have less predictable revenues. For most other industries, macroeconomic conditions and firm-level traits are more important. These findings give useful insights for financial managers to create flexible borrowing strategies and for policymakers to ensure stable borrowing conditions during periods of economic uncertainty.

Date of Award	6 Feb 2025
Original language	English
Awarding Institution	Universidade Católica Portuguesa
Supervisor	Diana Bonfim (Supervisor)