Firms’ leverage across business cycles

Antonio De Socio ()

No 587, Questioni di Economia e Finanza (Occasional Papers) from Bank of Italy, Economic Research and International Relations Area

Abstract: Based on a large sample of mostly unlisted non-financial companies, this paper studies the relationship between business cycles and firms’ leverage, disentangling the relative contributions of debt and equity and assessing the role of firm size in explaining cross-sectional heterogeneity. I find that aggregate leverage initially increases during busts, as debt growth remains steady, while the counterbalancing contribution of equity is smaller; after one year, as debt slows down, leverage decreases. Moreover, firm size matters, also after controlling for other proxies of financial frictions (age, risk, profitability, debt structure): leverage increases more at the beginning of busts for both very large and smaller firms; after one year, leverage decreases less for the latter, mainly due to persistently lower profits.

Keywords: debt; equity; firm size; business cycles; crises (search for similar items in EconPapers)
JEL-codes: E32 G01 G32 (search for similar items in EconPapers)
Date: 2020-12
New Economics Papers: this item is included in nep-bec, nep-fdg, nep-mac and nep-sbm
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Persistent link: https://EconPapers.repec.org/RePEc:bdi:opques:qef_587_20

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