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

Author

Listed:
  • Francisco Covas
  • Wouter 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.

Suggested Citation

  • Francisco Covas & Wouter den Haan, 2007. "Cyclical Behavior of Debt and Equity Using a Panel of Canadian Firms," Staff Working Papers 07-44, Bank of Canada.
    • Handle: RePEc:bca:bocawp:07-44
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    File URL: https://www.bankofcanada.ca/wp-content/uploads/2010/02/wp07-44.pdf
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    Citations

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    Cited by:

    1. Haitham A. Al‐Zoubi & Jennifer A. O'Sullivan & Aktham I. Al‐Maghyereh & Brendan J. Lambe, 2023. "Disentangling Sentiment from Cyclicality in Firm Capital Structure," Abacus, Accounting Foundation, University of Sydney, vol. 59(2), pages 570-605, June.
    2. Francisco Covas & Yahong Zhang, 2010. "Price‐level versus inflation targeting with financial market imperfections," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 43(4), pages 1302-1332, November.
    3. Francisco Covas & Wouter J. Den Haan, 2012. "The Role of Debt and Equity Finance Over the Business Cycle," Economic Journal, Royal Economic Society, vol. 122(565), pages 1262-1286, December.
    4. 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.
    5. Fabio Ghironi & Karen K. Lewis, 2011. "Equity Sales and Manager Efficiency Across Firms and the Business Cycle," IMES Discussion Paper Series 11-E-07, Institute for Monetary and Economic Studies, Bank of Japan.
    6. Alessandro Fiaschi, 2009. "Managerial discretion and optimal financing policies with cash flow uncertainty," Working Papers 3, Doctoral School of Economics, Sapienza University of Rome.
    7. Nikolov, Kalin, 2011. "A model of borrower reputation as intangible collateral," MPRA Paper 32939, University Library of Munich, Germany.
    8. Pablo Kurlat, 2013. "Lemons Markets and the Transmission of Aggregate Shocks," American Economic Review, American Economic Association, vol. 103(4), pages 1463-1489, June.
    9. Nikolov, Kalin, 2014. "Collateral amplification under complete markets," Journal of Economic Dynamics and Control, Elsevier, vol. 45(C), pages 80-93.

    More about this item

    Keywords

    Business fluctuations and cycles;

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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