Firms’ Leverage Across Business Cycles

41 Pages Posted: 14 Apr 2021

Date Written: December 22, 2020


Based on a large sample of mostly unlisted non-financial companies, this paper studies the relationship between business cycles and firms’ leverage, disentangling the relative contributions of debt and equity and assessing the role of firm size in explaining cross-sectional heterogeneity. I find that aggregate leverage initially increases during busts, as debt growth remains steady, while the counterbalancing contribution of equity is smaller; after one year, as debt slows down, leverage decreases. Moreover, firm size matters, also after controlling for other proxies of financial frictions (age, risk, profitability, debt structure): leverage increases more at the beginning of busts for both very large and smaller firms; after one year, leverage decreases less for the latter, mainly due to persistently lower profits.

Keywords: debt, equity, firm size, business cycles, crises

JEL Classification: E32, G01, G32

Suggested Citation

De Socio, Antonio, Firms’ Leverage Across Business Cycles (December 22, 2020). Bank of Italy Occasional Paper No. 587, Available at SSRN: or

Antonio De Socio (Contact Author)

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184

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