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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))

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.

Suggested Citation

  • Mitsuru Katagiri, 2011. "A Macroeconomic Approach to Corporate Capital Structure," IMES Discussion Paper Series 11-E-28, Institute for Monetary and Economic Studies, Bank of Japan.
    • Handle: RePEc:ime:imedps:11-e-28
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    3. Paseda, Oluseun & Obademi, Olalekan, 2020. "Macroeconomic variables and their effects on the capital structure of quoted Nigerian firms," MPRA Paper 117060, University Library of Munich, Germany, revised 31 Jan 2020.
    4. Bistuer-Talavera, Cristobal & Llobet-Dalmases, Joan & Plana-Erta, Dolors & Uribe, Jorge M., 2024. "Capital structure decisions in the energy transition: Insights from Spain," Utilities Policy, Elsevier, vol. 91(C).
    5. Marios Karabarbounis & Patrick Macnamara & Roisin McCord, 2014. "A Business Cycle Analysis of Debt and Equity Financing," Economic Quarterly, Federal Reserve Bank of Richmond, issue 1Q, pages 51-85.
    6. Rana El Bahsh & Ali Alattar & Aziz N. Yusuf, 2018. "Firm, Industry and Country Level Determinants of Capital Structure: Evidence from Jordan," International Journal of Economics and Financial Issues, Econjournals, vol. 8(2), pages 175-190.
    7. Toshiaki Ogawa, 2020. "Liquidity Management of Heterogeneous Banks during the Great Recession," IMES Discussion Paper Series 20-E-05, Institute for Monetary and Economic Studies, Bank of Japan.
    8. Ogawa, Toshiaki, 2022. "Welfare implications of bank capital requirements under dynamic default decisions," Journal of Economic Dynamics and Control, Elsevier, vol. 138(C).
    9. Alimov, Behzod, 2022. "The dynamic effects of debt and equity inflows: Evidence from emerging and developing countries," The Journal of Economic Asymmetries, Elsevier, vol. 26(C).
    10. Bolaji Tunde Matemilola & Mohamed Azali, 2021. "Interaction Impact of Monetary Policy and Inflation on Corporate Debt in Developing Nations," Capital Markets Review, Malaysian Finance Association, vol. 29(1), pages 1-16.
    11. Poeschl, Johannes, 2023. "Corporate debt maturity and investment over the business cycle," European Economic Review, Elsevier, vol. 152(C).
    12. Llobet-Dalmases, Joan & Plana-Erta, Dolors & Uribe, Jorge M., 2023. "Cyclical capital structure decisions," The North American Journal of Economics and Finance, Elsevier, vol. 66(C).
    13. Marios Karabarbounis & Patrick Macnamara, 2021. "Misallocation and Financial Frictions: the Role of Long-Term Financing," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 40, pages 44-63, April.
    14. Marios Karabarbounis & Patrick Macnamara, 2019. "Misallocation and Credit Market Constraints: the Role of Long-Term Financing," Working Paper 19-1, Federal Reserve Bank of Richmond.
    15. John A. Olayiwola & Folorunsho M. Ajide, 2019. "Do Oil Price and Institutional Quality Matter for Dividend Policy in Nigeria?," Working Papers 12, Department of Economics, University of Ilorin.

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    Keywords

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    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity

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