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Macroeconomic Conditions and Capital Raising

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Author Info

  • Erel, Isil

    (Ohio State University)

  • Julio, Brandon

    (London Business School)

  • Kim, Woojin

    (Korea University-Business School)

  • Weisbach, Michael S.

    () (Ohio State University)

Abstract

Economic theory, as well as commonly-stated views of practitioners, suggests that macroeconomic conditions can affect both the ability and manner in which firms raise external financing. Theory suggests that downturns should be associated with a shift toward less information-sensitive securities, as well as a ‘flight to quality,’ in which firms can issue high-rated securities but not low-rated ones. We evaluate these hypotheses on a large sample of publicly-traded debt issues, seasoned equity offers, and bank loans. We find that worse macroeconomic conditions lead firms to use less information-sensitive securities. In addition, poor market conditions affect the structure of securities offered, shifting them towards shorter maturities and more security. Furthermore, market conditions affect the quality of securities offered, with worsening conditions substantially lowering the number of low-rated debt issues. Overall, these findings suggest that macroeconomic conditions are important factors in firms’ capital raising decisions.

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Bibliographic Info

Paper provided by Institute for Financial Research in its series SIFR Research Report Series with number 74.

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Length: 49 pages
Date of creation: 17 Sep 2010
Date of revision: 26 Oct 2011
Handle: RePEc:hhs:sifrwp:0074

Note: Please find updated version on http://fisher.osu.edu/fin/faculty/weisbach/wpapers.html
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Keywords: Market downturns; Security choice; Maturity; Security;

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References

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  1. Malcolm Baker, 2009. "Capital Market-Driven Corporate Finance," Annual Review of Financial Economics, Annual Reviews, vol. 1(1), pages 181-205, November.
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  3. Almeida, Heitor & Campello, Murillo & Weisbach, Michael S., 2008. "Corporate Financial and Investment Policies When Future Financing Is Not Frictionless," Working Paper Series 2008-16, Ohio State University, Charles A. Dice Center for Research in Financial Economics.
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Cited by:
  1. Kathleen M. Kahle & René M. Stulz, 2010. "Financial Policies and the Financial Crisis: How Important Was the Systemic Credit Contraction for Industrial Corporations?," NBER Working Papers 16310, National Bureau of Economic Research, Inc.
  2. Kahle, Kathleen M. & Stulz, Rene M., 2011. "Financial Policies, Investment, and the Financial Crisis: Impaired Credit Channel or Diminished Demand for Capital?," Working Paper Series 2011-3, Ohio State University, Charles A. Dice Center for Research in Financial Economics.

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