Such theories do not simply have the cross-sectional implication that small ¯rms' risk will be more strongly a®ected by tighter credit markets in all eco- nomic states. Based on the idea that a decline in a borrower's net worth raises the agency cost on external ¯nance, the theories identify asymmetries in the e®ect of tighter credit market conditions on risk during recessions and expansions. In a recession, small ¯rms' net worth, and hence their collateral, will be lower than usual and tighter credit markets will be associated with stronger adverse e®ects than during an expansion when these ¯rms' collateral is higher. .
