Why Does Capital Structure Choice Vary With Macroeconomic Conditions?

This paper studies macroeconomic conditions and ...nancing decisions of ...rms that face various degrees of agency problems. A calibrated model is developed that explains the pronounced counter-cyclical leverage patterns observed for ...rms that access public capital markets. It relates these patterns to debt and equity issues. Moreover, it explains why leverage and debt issues do not exhibit this pronounced behavior for ...rms that face more severe constraints when accessing capital markets. In the model, managers issue a combination of debt and equity to ...nance investment by weighing the trade-o¤ 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 ...rm’s equity. JEL Classi...cation: G32, G1