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American Economic Review: Vol. 101 No. 2 (April 2011)


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The Cyclical Behavior of Debt and Equity Finance

Article Citation

Covas, Francisco, and Wouter J. Den Haan. 2011. "The Cyclical Behavior of Debt and Equity Finance." American Economic Review, 101(2): 877-99.

DOI: 10.1257/aer.101.2.877


Debt and equity issuance are procyclical for most size-sorted firm categories of listed US firms and the procyclicality of equity issuance decreases monotonically with firm size. At the aggregate level, however, the results for equity issuance are not conclusive due to different behavior of the largest firms, especially those in the top one percent. During a deterioration in economic conditions, firms limit the impact of the reduction in external financing on investment by shedding financial assets. This is true for a worsening in aggregate as well as firm-specific conditions. (JEL E32, G32, L11, L25)

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Covas, Francisco (Federal Reserve Board)
Den Haan, Wouter J. (U Amsterdam)

JEL Classifications

E32: Business Fluctuations; Cycles
G32: Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure
L11: Production, Pricing, and Market Structure; Size Distribution of Firms
L25: Firm Performance: Size, Diversification, and Scope

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