Interdependent capital structure choices and the macroeconomy

Jose Gomez-Gonzalez, Jorge Hirs-Garzon and Jorge Uribe

The North American Journal of Economics and Finance, 2022, vol. 62, issue C

Abstract: This study shows that capital structure choices of US corporations are interdependent across time. We follow a two-step estimation approach. First, using a large cross-section of firms we estimate year-by-year average capital structure choices, i.e., the average firm’s percentage of new funding that is secured through debt, its term composition, and the percentage of new equity represented by retained earnings. Second, these time series are included in a Factor Augmented Vector Autoregressive model in which three factors representing real economic activity, expected future funding conditions, and prices, are included. We test for the interdependence between optimal capital structure decisions and for the influence exerted by macroeconomic conditions on these decisions. Results show there is a hierarchical order in which firms make capital structure decisions. They first decide on the share of debt out of total new funding they will hire. Conditional on this they decide on the term of their debt and on their earnings retention policy. Of outmost importance, macroeconomic factors are key for making capital structure decisions.

Keywords: Firms’ capital structure; Financing hierarchy; Macroeconomic factors; FAVAR model (search for similar items in EconPapers)
JEL-codes: D25 G30 L16 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S1062940822000985
Full text for ScienceDirect subscribers only

Related works:
Working Paper: Interdependent Capital Structure Choices and the Macroeconomy (2021)
Working Paper: Interdependent Capital Structure Choices and the Macroeconomy (2021)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:ecofin:v:62:y:2022:i:c:s1062940822000985

DOI: 10.1016/j.najef.2022.101750

Access Statistics for this article

The North American Journal of Economics and Finance is currently edited by Hamid Beladi

More articles in The North American Journal of Economics and Finance from Elsevier
Bibliographic data for series maintained by Catherine Liu ().