Firm Financing over the Business Cycle

By Juliane Begenau, Juliana Salomao. The Review of financial studies, 2018

122 citations recorded by the source corpus.

In the data, large public firms substitute between debt- and equity financing over the business cycle whereas small firms' financing policy is pro-cyclical for debt and equity. This paper proposes a mechanism that explains these cyclical patterns. Small firms grow faster and need therefore more funds compared to large firms. During times with high aggregate productivity, they quickly exhaust their endogenous debt limit and must turn to equity financing. In contrast, large firms are close to their efficient scale and want to payout to shareholders. Good times lower the probability of default, decreasing the costs of debt financing for large firms so that debt is used to payout to shareholders. We embed this mechanism in a quantitative firm industry model with endogeneous firm dynamics and explore how macroeconomic shocks get amplified.

View Paper: https://www.semanticscholar.org/paper/f64f2968b0287cd7b6f903083090e4001d6d471c

Citations in the corpus

• Big data in finance and the growth of large firms (2018, unknown): “In addition, a number of papers analyze how size affects the cost of capital, e.g. Cooley and Quadrini (2001), Hennessy and Whited (2007), and Begenau and Salomao (2017).”
• Monetary Policy, Corporate Finance and Investment (2018, unknown): “Covas and Den Haan (2011) and Begenau and Salomao (2018) study debt versus equity issuance by firm size over the business cycle.”