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Interdependent Capital Structure Choices and the Macroeconomy

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

No 202107, IREA Working Papers from University of Barcelona, Research Institute of Applied Economics

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. JEL classification: D25; G30; L16. (search for similar items in EconPapers)
Pages: 33 pages
Date: 2021-04, Revised 2021-04
New Economics Papers: this item is included in nep-cfn, nep-fdg and nep-mac
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Journal Article: Interdependent capital structure choices and the macroeconomy (2022) Downloads
Working Paper: Interdependent Capital Structure Choices and the Macroeconomy (2021) Downloads
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