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Capital structure adjustment speed over the business cycle

Liu Gan, Wujun Lv and Yifei Chen

Finance Research Letters, 2021, vol. 39, issue C

Abstract: This paper extends the DeMazro and He (2019) model of capital structure dynamics by introducing macroeconomic conditions. Our goal is to analyze how business cycle risks impact a firm’s capital structure adjustment speed. Based on our calibration, the model predicts that the capital structure adjustment is slower in the presence of macroeconomic risk. Importantly, we also demonstrate that firms adjust their capital structure faster in good macroeconomic states versus bad economic states, which is consistent with empirical evidence. Finally, we provide several new predictions for how the key parameters of the model affect a firm’s capital structure adjustment speed.

Keywords: Dynamic capital structure; Speed of adjustment; Macroeconomic conditions (search for similar items in EconPapers)
JEL-codes: G11 G18 G23 G34 (search for similar items in EconPapers)
Date: 2021
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:39:y:2021:i:c:s1544612319305185

DOI: 10.1016/j.frl.2020.101574

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