Firm Financing over the Business Cycle

We study the investment and nancing policies of public U.S. rms. Large rms substitute between debtand equity nancing over the business cycle whereas small rms' nancing policy for debt and equity is pro-cyclical. This paper proposes a novel mechanism that explains these cyclical patterns in a quantitative heterogeneous rm industry model with endogenous rm dynamics. We nd that cross-sectional di erences in investment policies and therefore funding needs as well as exposure to nancial frictions are key to understand how rms' nancing policies respond to macroeconomic shocks. Financial frictions cause rms to be larger with lower valuations and less investments. ∗We are deeply indebted to Monika Piazzesi, Martin Schneider, Manuel Amador, and Pablo Kurlat for their invaluable guidance. We also want to thank our discussants Lukas Schmid, Toni Whited, Cecilia Parlatore, and Vincenzo Quadrini for their insights. The paper bene ted from conversations with Frederico Belo, Simon Gilchrist, Joao Gomes, Ellen McGrattan, Amir Yaron, and comments from participants at the FRB San Francisco, AFA 2016, the NBER Capital Market Summer Instiute 2015, the Junior Faculty Research Roundtable at UNC 2015, Boston University, the UBC 2015 Winter conference, University of Minnesota, the 2014 Johnson Corporate Finance Conference, the Society of Economic Dynamics 2014 in Toronto, and Stanford. We thank Young Min Kim for excellence research assistance. The authors gratefully acknowledge the support by the Kohlhagen Fellowship Fund and the Haley-Shaw Fellowship Fund of the Stanford Institute for Economic Policy Research (SIEPR). Juliane Begenau is also grateful for the support by the Macro Financial Modeling Group dissertation grant from the Alfred P. Sloan Foundation. Email: [email protected] and [email protected]