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A Macroeconomic Approach to Corporate Capital Structure

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  • Mitsuru Katagiri

    (Economist, Institute for Monetary and Economic Studies, Bank of Japan (E-mail: mitsuru.katagiri@boj.or.jp))

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    Abstract

    In this paper, I investigate the cross-sectional determinants of corporate capital structure using a general equilibrium model with endogenous firm dynamics, a realistic tax environment, and financial frictions. I find that the equilibrium firm distribution in the model replicates fairly well the distribution of corporate capital structure as well as the relationship between capital structure, profitability, and firm size in the data. The key mechanisms here are economies of scale and two types of productivity shocks: persistent and transitory. The counterfactual experiment using the model implies, among other things, that tax benefits have relatively small effects on corporate capital structure choice compared with default costs and the costs of outside equity, including the dividend tax. It also reveals that the effects of those frictions on corporate capital structure choice are highly interrelated with each other.

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    Bibliographic Info

    Paper provided by Institute for Monetary and Economic Studies, Bank of Japan in its series IMES Discussion Paper Series with number 11-E-28.

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    Date of creation: Dec 2011
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    Handle: RePEc:ime:imedps:11-e-28

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    Keywords: Corporate Capital Structure; Dynamic Trade-off Theory; Heterogeneous Firm Model;

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    1. Jianjun Miao, 2003. "Optimal Capital Structure and Industry Dynamics," Industrial Organization 0310001, EconWPA.
    2. Stewart C. Myers, 1984. "Capital Structure Puzzle," NBER Working Papers 1393, National Bureau of Economic Research, Inc.
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