Do Agency Relations Mediate the Interaction Between Firms’ Financial Policies and Business Cycles?

56 Pages Posted: 31 Oct 2010 Last revised: 14 Mar 2011

See all articles by Charles H. J. Reuter

Charles H. J. Reuter

University of Lorraine - CEREFIGE Research Center; Labex-Refi

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Date Written: November 2010


We investigate the interactions between firms’ financial policies and expected business cycles, in listed firms, in Europe, and over 20 years. We show that these interactions are mediated by ownership structures. Firms with strongly concentrated ownership, or under control, lead contra-cyclical policies, while firms with dispersed ownership lead somewhat pro-cyclical policies, supporting the traditional expectation, based on the dispersed ownership role model, that business cycles are of little direct relevance for financial policies.

Our theoretical considerations unfold from the idea that ownership dispersion implies a different mix in agency relations in the firm. It entails specificities in agency costs, opportunity benefits of managerial discretion, and it fosters differing needs for disciplining through debt, for signaling, and potentially different market timing behaviors by managers and incumbent shareholders. Our contribution extends potentially to a number adjacent research questions including, among others, the analysis of performance effects of ownership concentration, the relative assessment of governance mechanisms, a focus on specific behaviors as part of capital structures research, or the mediating effect of agency relations for analyzing the effects of business cycles - and financial shocks - on firms’ financial policies.

Keywords: Agency Theory, International Capital Structure, Business Cycles, Ownership Dispersion, Entrenchment, Managerial Discretion, Institutional Context

JEL Classification: G30, G32

Suggested Citation

Reuter, Charles H. J., Do Agency Relations Mediate the Interaction Between Firms’ Financial Policies and Business Cycles? (November 2010). Available at SSRN: or

Charles H. J. Reuter (Contact Author)

University of Lorraine - CEREFIGE Research Center ( email )

13 rue Michel Ney
Nancy, 54000

Labex-Refi ( email )

79 Avenue de la République
Paris, 75011

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