Security issuance and the business cycle

We use a simple model of investment and external finance to analyze the relationship among the issuance of securities, financial market valuations and, alternatively, aggregate investment or cash flows. We find that issuance is driven by market valuations, and does not influence aggregate investment, whereas investment has a negative impact on equity issuance. Moreover, we obtain widespread evidence that equity and debt are complementary sources of finance, and that positive shocks to cash flows are associated with larger issuance of debt.