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The role of debt and equity finance over the business cycle

Covas, Francisco and Den Haan, Wouter J. (2012) The role of debt and equity finance over the business cycle. Economic Journal, 122 (565). pp. 1262-1286. ISSN 0013-0133

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Abstract

If equity issuance is introduced into the costly state verification framework and the friction firms face in raising equity is acyclical, then the model cannot simultaneously generate procyclical equity issuance and a countercyclical default rate. This requires a countercyclical equity issuance friction. With a countercyclical friction, the model can also overturn an undesirable feature of the standard debt-only model: dampening of shocks. To quantitatively match observed patterns, the friction in the cost of raising equity has to vary a lot more over the business cycle than can be justified by estimates of cyclical changes in direct equity issuance costs.

Item Type: Article
Official URL: http://onlinelibrary.wiley.com/journal/10.1111/%28...
Additional Information: © 2012 The Authors
Library of Congress subject classification: H Social Sciences > HG Finance
Journal of Economic Literature Classification System: E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E32 - Business Fluctuations; Cycles
Sets: Departments > Economics
Collections > Economists Online
Rights: http://www.lse.ac.uk/library/usingTheLibrary/academicSupport/OA/depositYourResearch.aspx
Date Deposited: 23 Aug 2012 15:18
URL: http://eprints.lse.ac.uk/45548/

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