Contracting Costs and the Window of Opportunity for Straight Debt Issues;

We analyze whether fluctuation in economy-wide factors cause time-series variation in thecontracting costs of moral hazard, adverse selection, and financial distress, and so create windows ofopportunity for firms to issue debt. Using the announcement period abnormal returns as one measure of theoverall contracting costs of debt issues, we specifically study whether economy-wide factors affect theimpact of firm-specific measures of contracting costs on the abnormal returns. We find that debt issues aremore costly in periods of higher interest rates and in industry downturns. When we partition the impact ofeach issue- and firm-specific measure of contracting costs across high and low levels of each economy-widevariable, we find that only the measures of agency cost become significant in general, but issue-specificmeasures of financial distress also become relevant in subsamples.