The Aggregate Dynamics of Capital Structure and Macroeconomic Risk

By Harjoat S. Bhamra, L. Kuehn, Ilya A. Strebulaev. 2010

280 citations recorded by the source corpus.

We study the impact of time-varying macroeconomic conditions on optimal dynamic capital structure for a cross-section of firms. Our structural-equilibrium framework embeds a contingent-claim corporate financing model within a consumption-based asset-pricing model. We investigate the effect of macroeconomic conditions on asset valuation and optimal corporate policies, and of preferences on capital structure. While capital structure is pro-cyclical at dates when firms re-lever, it is counter-cyclical in aggregate dynamics, consistent with empirical evidence. We also find that financially constrained firms choose more pro-cyclical policies and that leverage accounts for most of the macroeconomic risk relevant for predicting defaults, but is a poor measure of how preferences impact capital structure. The Author 2010. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail: journals.permissions@oxfordjournals.org., Oxford University Press.

Subfields: Economics and Econometrics, Finance

View Paper: https://www.semanticscholar.org/paper/eec28b68183b44d4203b68d50cf5d865c4b464cc

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Citations in the corpus

Issuer Quality and Corporate Bond Returns (2013, background): “Bhamra, Kuehn, and Strebulaev (2008) and Chen (2009) combine consumption-based models in the long-run risks traditional with dynamic models of optimal capital structure.”
Limited Arbitrage between Equity and Credit Markets (2012, unknown): “Specifications [9] and [10] consider the impact of idiosyncratic risk as estimated from the regression of the three-factor Fama–French model.”
A Market-Based Study of the Cost of Default (2012, background): “…bond-pricing models (Eom, Helwege, and Huang (2004); Huang and Huang (2003)), calibrations of dynamic models of the levered firm (Miao (2005)), studies of the effect of macroeconomic variables on asset prices and capital structure (Bhamra, Kuehn, and Strebulaev (2010a, 2010b)), and other settings.”
Institutional Determinants of Capital Structure Adjustment Speeds (2012, background): “Finally, Bhamra, Kuehn, and Strebulaev (2010) examine the effect of macroeconomic variables on optimal dynamic capital structure and the aggregate dynamics of firms in a cross section but do not include time-invariant country characteristics.”
Government debt and corporate leverage: International evidence (2019, background): “The crowding out of private activities by the government has been debated in the economics literature at least since Friedman (1972), Blinder and Solow (1973), and Barro (1974).”