Are U.S. corporations overburdened with debt? Since 1970, internal funds have been taking wider swings as percentages of total funds sources, as compared with the 1950s and 1960s. Furthermore, use of debt financing has been consistently higher since the mid-1960s than during previous periods throughout the century. And short-term debt has accounted for most of this rise.

After adjustment for inflation, however, the figures indicate that, since 1974, corporations have relied heavily on internal funds and cut their cost of debt financing to levels that are not high by historical standards. Despite fluctuations in internal funds and increased use of short-term debt, corporations do not appear to have significantly riskier capital structures than they’ve had in the past.

An examination of determinants of the composition of capital structure reveals that corporate reliance on debt financing increases as capital expenditures rise relative to available internal funds. Use of debt financing is limited, however, by investors’ perceptions of the riskiness of the business environment and by relative supplies of federal government securities. Over long periods, furthermore, the tax system seems to affect the level of debt financing; corporate borrowing increases as personal income tax rates rise above corporate levels.