Examining the Influence of Interest Rate Changes on Corporate Borrowing and Capital Structure Decisions

Abstract

Interest rates are a fundamental component of corporate finance, influencing various aspects of business decision-making, particularly in relation to borrowing and capital structure. This paper explores the relationship between interest rate changes and corporate borrowing decisions, as well as their impact on a firm's capital structure. By examining both macroeconomic and microeconomic perspectives, this study assesses how fluctuations in interest rates can alter corporate debt and equity financing choices. The analysis incorporates both theoretical frameworks and empirical data, shedding light on the behavioral responses of firms to interest rate changes. The study also considers the role of other factors such as firm size, industry characteristics, and economic cycles in shaping capital structure decisions. The findings indicate that interest rates significantly influence borrowing behavior, with firms tending to rely more on debt financing when interest rates are low and shifting towards equity financing as rates increase. The paper concludes by providing insights into how firms can strategically manage their capital structures in response to interest rate movements, highlighting policy implications for corporate finance managers.