December 1, 2000
Amnon Levy
ABSTRACT
This paper develops a calibrated model that explains the pronounced counter-cyclical leverage patterns observed
for firms that access public capital markets, and relates these patters to debt and equity issues. Moreover, it
explains why leverage and debt issues do not exhibit this pronounced behavior for firms that face more severe constraints
when accessing capital markets. In the model, managers issue a combination of debt and equity to finance investment
by weighing the trade-off.between agency problems and risk sharing. During contractions, leveraged managers receive
a relatively small share of wealth, resulting in a relative increase in household demand for securities. Securities
markets clear as managers that are not up against their borrowing constraints increase leverage while satisfying
the agency condition that they maintain a large enough portion of their firm’s equity.
Subject: Corporate Finance/Capital Structure and Dividend Policy
Classification: Economics/Macroeconomics
Amnon Levy
Institution: Stern School of Business, New York University
Email: alevy@stern.nyu.edu
Telephone: (212) 998-0302
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