By clicking the "Accept" button or continuing to browse our site, you agree to first-party and session-only cookies being stored on your device to enhance site navigation and analyze site performance and traffic. For more information on our use of cookies, please see our Privacy Policy.
Long-term debt is the main source of firm financing in the United States. We show that accounting for debt maturity is essential for understanding business cycle dynamics. We develop a macroeconomic model with defaultable long-term debt and costly equity issuance. Long-term debt creates incentives for firms to raise leverage and dilute outstanding claims. When equity issuance is costly, this debt dilution channel mitigates net worth losses through balance sheet effects, dampening investment responses to negative financial shocks. Using firm-level data, we estimate equity issuance costs and embed them in a DSGE model, where credit supply shocks dominate business cycle fluctuations.
