Financial Contracting Along the Business Cycle

34 Pages Posted: 25 May 2003

See all articles by Andrea Attar

Andrea Attar

Toulouse School of Economics; University of Roma Tor Vergata

Date Written: December 30, 2002

Abstract

This paper suggests the existence of a relationship between business cycle fluctuations and firms' capital structure. The presence of asymmetric information in the loan market is responsible for endogenous fluctuations to take place at equilibrium. We depart from the more traditional endogenous cycles schemes in introducing a repeated lender-borrower interaction that allows for debt and equity financing to coexist in every period. We define sufficient conditions for the overall economy debt-equity ratio to exhibit a countercyclical behavior. This result is widely supported by several recent empirical finance studies. It also suggests a potential departure from the classic pecking order of financing theory.

Keywords: financial contracts, endogenous fluctuations, costly state verification

JEL Classification: E3, G3

Suggested Citation

Attar, Andrea, Financial Contracting Along the Business Cycle (December 30, 2002). Available at SSRN: https://ssrn.com/abstract=358000

Andrea Attar (Contact Author)

Toulouse School of Economics

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Toulouse, F 31000
France
+33 5 61128578 (Phone)

University of Roma Tor Vergata ( email )

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00100 Rome
Italy

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