Why does capital structure choice vary with macroeconomic conditions?

We develop a computable general equilibrium model explaining financing over the business cycle. To avert agency conflicts, managers must hold a high percentage of their firm's equity. During contractions, firms substitute debt for equity in order to maintain managerial equity shares. During expansions, risk-sharing improves, with increases in managerial wealth facilitating substitution of equity for debt. In calibrated simulations, (counter) cyclical variation in leverage is only exhibited by less constrained firms. All firms exhibit financial accelerator effects. However, the effect is decreasing in financial flexibility. The model's predictions regarding financing and investment are consistent with empirical evidence.