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Financial Aspects of Business Cycles: An Analysis of Balance Sheet Adjustments of U.S. Nonfinancial Enterprises over the Twentieth Century

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  • ROBERT E. KRAINER

Abstract

This paper formulates and tests a model of asset and financing adjustments of nonfinancial enterprises over the twentieth century. Asset adjustments change the expected income and operating risk of firms while financing adjustments change financial risk. To protect debt and equity investors from a conflict of interest problem, an up‐front contract develops an “assignment” rule for managing the firm's balance sheet whereby managers make investment decisions that conform to the risk aversion of stockholders and financing decisions that offset changes in operating risk resulting from investment decisions. Empirical evidence gathered in this paper fails to reject the predictions of the model.

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  • Robert E. Krainer, 2014. "Financial Aspects of Business Cycles: An Analysis of Balance Sheet Adjustments of U.S. Nonfinancial Enterprises over the Twentieth Century," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 46(2-3), pages 371-407, March.
    • Handle: RePEc:wly:jmoncb:v:46:y:2014:i:2-3:p:371-407
    DOI: 10.1111/jmcb.12110
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    Cited by:

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    3. Machokoto, Michael & Areneke, Geofry & Ibrahim, Boulis Maher, 2020. "Rising corporate debt and value relevance of supply-side factors in South Africa," Journal of Business Research, Elsevier, vol. 109(C), pages 26-37.
    4. Krainer, Robert E., 2014. "Monetary policy and bank lending in the Euro area: Is there a stock market channel or an interest rate channel?," Journal of International Money and Finance, Elsevier, vol. 49(PB), pages 283-298.

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