Financial Contracting Along the Business Cycle'
CORE Discussion Paper No. 2003/69
30 Pages Posted: 31 May 2007
Date Written: October 2003
The paper investigates the effects of macroeconomic conditions on firms' capital structure. We introduce a repeated lender-borrower interaction that allows for debt and equity financing to co-exist as optimal securities in every period. The presence of asymmetric information in the market for loans is responsible for endogenous fluctuations to take place.It is possible to state sufficient conditions for the overall economy debt-equity ratio to exhibit a counter-cyclical behavior. This result is widely supported by several recent empirical finance works.
Keywords: Optimal Financial Contracts, Endogenous Fluctuations.
JEL Classification: D92, E33, G33.
Suggested Citation: Suggested Citation