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Firm Size, Capital Investment, and Debt Financing over Industry Business Cycles

Published online by Cambridge University Press:  06 November 2023

Praveen Kumar  and
Vijay Yerramilli Open the ORCID record for Vijay Yerramilli [Opens in a new window]
Praveen Kumar
Affiliation:
University of Houston C. T. Bauer College of Business pkumar@bauer.uh.edu
Vijay Yerramilli*
Affiliation:
University of Houston C. T. Bauer College of Business
*
vyerramilli@bauer.uh.edu (corresponding author)
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Abstract

We find that capital investment and net debt issuance of large firms are, on average, more sensitive to industry business cycles than those of small firms, in stark contrast to the effect of size on investment sensitivity to macroeconomic cycles. We theoretically examine the role of firm size on firms’ responses to industry shocks. Consistent with our theoretical predictions, we find that large firms exhibit greater sensitivity to industry cycles than small firms in their investment and net debt issuance only in industries with low cyclical variability of markups and production growth, high fixed cost intensity, high market-to-book, and high markups.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , First View , pp. 1 - 27
Copyright
© The Author(s), 2023. Published by Cambridge University Press on behalf of the Michael G. Foster School of Business, University of Washington

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Footnotes

We thank an anonymous referee, Franklin Allen, Tim Bresnahan, Harry DeAngelo, Ran Duchin (the editor), Nils Gottfries, Vidhan Goyal, Dirk Hackbarth, Hugo Hopenhayn, Eliza Pazaj, and Adriano Rampini for their helpful comments or discussions on issues examined in the article. All remaining errors are our responsibility.

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