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Please use this identifier to cite or link to this item: http://hdl.handle.net/2451/26707

Title: Why Does Capital Structure Choice Vary With Macroeconomic Conditions?
Authors: Levy, Amnon
Issue Date: 1-Dec-2000
Series/Report no.: FIN-00-042
Abstract: This paper develops a calibrated model that explains the pronounced counter-cyclical leverage patterns observed for firms that access public capital markets, and relates these patters to debt and equity issues. Moreover, it explains why leverage and debt issues do not exhibit this pronounced behavior for firms that face more severe constraints when accessing capital markets. In the model, managers issue a combination of debt and equity to finance investment by weighing the trade-off between agency problems and risk sharing. During contractions, leveraged managers receive a relatively small share of wealth, resulting in a relative increase in household demand for securities. Securities markets clear as managers that are not up against their borrowing constraints increase leverage while satisfying the agency condition that they maintain a large enough portion of their firm’s equity.
URI: http://hdl.handle.net/2451/26707
Appears in Collections:Finance Working Papers

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