Macroeconomic Conditions, Financial Constraints, and Firms’ Financing Decisions
47 Pages Posted: 15 Sep 2018 Last revised: 21 Dec 2018
Date Written: August 30, 2018
We examine how time-varying macroeconomic conditions affect firms’ financing decisions. A principal components decomposition of several macroeconomic variables characterizes three phases of the business cycle relative to recessions: early recovery, robust recovery, and economic crest; a fourth represents “windows of opportunity” in capital markets that are unrelated to recessions. This characterization yields results that traditional approaches miss. Specifically, debt issuance exhibits a non-monotonic pattern during the upward phase of the business cycle: it declines in robust recovery relative to recessions but peaks at the economic crest. Financially constrained firms issue more equity during windows of high stock market valuation, whereas unconstrained firms time debt issuance in response to debt market spreads.
Keywords: Capital Structure, Debt Maturity, Financial Constraints, Macroeconomic Conditions, Market Timing
JEL Classification: G32, E32
Suggested Citation: Suggested Citation