Capital structure and business cycles


  • Shumi Akhtar

    1. Australian National University, School of Finance, Actuarial Studies, and Applied Statistics, College of Business and Economics, Canberra, ACT 0200, Australia
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  • I thank Professor Tom Smith and Dr Barry Oliver for valuable comments. This project was funded by the CIGS/FASIGS SA10 and RF10.


This study investigates the relationship between business cycles and capital structure. Specifically, it extends the work of Lemmon et al. (2008), by incorporating the effect of four different stages of the business cycle – peak, contraction, trough and expansion – on the relative importance of the unobserved permanent component of the capital structure. Results indicate that business cycles play an important role in explaining the unobserved permanent component of leverage ratios after controlling for firm fixed effects. In particular, the model becomes much stronger in explaining the variation in leverage ratios after accounting for business cycle phases.