Our ninth conference on Progress and Business Cycle in Theory and Observe, 5-6 July 2018. Our paper pertains to a series of papers that embeds a quantitative asset pricing model right into a heterogeneous firm model with a dynamic capital structure alternative to study how credit spreads and the fairness premium are determined (e.g., Bhamra, Kuehn, and Strebulaev (2010) ; Belo, Lin, and Yang (2014) ; Gomes and Schmid (2010) ; Gomes and Schmid (2012) ). In these papers, firm dimension is oftentimes mounted after entry and subsequently not used as a dimension of heterogeneity like in this paper.
This was the case in Grewal and Tansuhaj ( 2001 ), Ou et al. ( 2014 ), Srinivasan et al. ( 2005 ), and Özturan et al. ( 2014 ). Three of those research use administration surveys that have been collected right after a severe financial recession that hit Asia in 1997 (Grewal and Tansuhaj 2001 ), or that hit the U.S. (Srinivasan et al. 2005 ) and Turkish financial system (Özturan et al. 2014 ) in 2001.
Our mechanism produces the following predictions: (1) equity payout is growing in dimension; (2) leverage is increasing in size; (3) payout throughout booms is rising in measurement and profitability; (4) small, unprofitable corporations improve equity financing throughout booms; (5) large, worthwhile firms pay out during booms; and (6) all companies finance extra with debt throughout booms.
However, at the turn of the twenty-first century, after greater than a decade of economic prosperity, a severe contraction hit the global economic system, which reminded entrepreneurs that BCs can severely disrupt enterprise actions, and even threaten many companies’ survival prospects.
Srinivasan et al. ( 2011 ) show, across many industries, that firms, from a profit standpoint, are likely to overspend on promoting in a recession, whereas van Heerde et al. ( 2013 ) discover that lengthy-term promoting elasticities are decrease in a recession, suggesting that advertising must be reduced during that time.