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Cyclical Behavior of Debt and Equity Using a Panel of Canadian Firms

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  • Francis Covas
  • Wouter J. Den Haan

Abstract

We document the cyclical behavior of debt, equity, and retained earnings for different firm categories using firm-level Canadian data. There is evidence of both procyclical equity and debt issuance for all firm categories but the timing differs. In particular, there is strong evidence that equity issuance increases in anticipation of an expansion. During this phase, some substitution between debt and equity takes place. After the expansion has reached its peak, equity issuance starts to decrease and during this phase there is strong evidence of procyclical debt issuance and some substitution out of equity seems to take place. Retained earnings is procyclical except for small firms.

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File URL: http://www.bankofcanada.ca/wp-content/uploads/2010/02/wp07-44.pdf
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Bibliographic Info

Paper provided by Bank of Canada in its series Working Papers with number 07-44.

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Length: 42 pages
Date of creation: 2007
Date of revision:
Handle: RePEc:bca:bocawp:07-44

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Keywords: Business fluctuations and cycles;

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Cited by:
  1. Alessandro Fiaschi, 2009. "Managerial discretion and optimal financing policies with cash flow uncertainty," Working Papers 3, Doctoral School of Economics, Sapienza University of Rome.
  2. Francisco Covas & Wouter J. den Haan, 2006. "The Role of Debt and Equity Finance over the Business Cycle," Working Papers 06-45, Bank of Canada.
  3. Strebulaev, Ilya A. & Whited, Toni M., 2012. "Dynamic Models and Structural Estimation in Corporate Finance," Foundations and Trends(R) in Finance, now publishers, vol. 6(1–2), pages 1-163, November.

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