| By: |
David Amdur (Department of Economics, Georgetown University) |
| Abstract: |
Why are aggregate equity payouts and debt issued positively correlated over
the business cycle in U.S. data? Standard real business cycle (RBC) models
have few predictions about capital structure, because they assume that nancial
markets are frictionless. On the other hand, the tradeo theory of capital
structure argues that nancial frictions determine rms' optimal mix of debt and
equity nancing. We develop an RBC model with nancial frictions and use it to
explain some stylized facts about aggregate U.S. debt and equity ows. We
document that debt issued and equity payouts are (i) positively correlated
with output, (ii) positively correlated with investment, and (iii) positively
correlated with each other. Our model can account for these stylized facts. We
also calibrate the model to the periods 1952 { 1983 and 1984 { 2007 in order
to explain the nding that real variables have become less volatile in the
later subperiod, while nancial variables have become more volatile. By varying
both the scale of technology shocks and the degree of nancial frictions, we
are able to account for both results. Classification-JEL Codes: E32, G32, G35 |
| Keywords: |
Debt-equity nance, RBC models, business cycle moderation, corporate nance, capital structure, tradeo theory, payout policy |
| Date: |
2008–08–03 |
| URL: |
http://d.repec.org/n?u=RePEc:geo:guwopa:gueconwpa~08-08-03&r=fdg |