Interest rate fluctuations and corporate financial leverage

• Interest rate fluctuations lower corporate financial leverage. • Credit ratings weaken the negative relationship we find. • Our paper has valuable implications for policymakers and practitioners. Interest rates directly affect corporate financing costs. In this paper, we explore the implications of interest rate fluctuations for corporate financing choices. Based on Chinese macro- and micro-data spanning from 2000 to 2023, we document that interest rate fluctuations are negatively related to corporate financial leverage and this effect is attenuated by corporate credit rating. The results are validated by a number of endogeneity and sensitivity tests. Further investigation reveals that cash holdings and trade credit are vital economic channels underlying the main relationship. Overall, this research greatly advances the literature on interest rates and financial leverage.