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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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  4. Joshua D. Rauh & Amir Sufi, 2008. "Capital Structure and Debt Structure," NBER Working Papers 14488, National Bureau of Economic Research, Inc.
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  9. Chemmanur, T.J. & Fulghieri, P., 1992. "Reputation, Renegotiation, and the Choice Between Bank Loans and Publicity Traded Debt," Papers 92-24, Columbia - Graduate School of Business.
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Citations

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Cited by:
  1. 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.
  2. Teodora Paligorova & João A. C. Santos, 2012. "When Is It Less Costly for Risky Firms to Borrow? Evidence from the Bank Risk-Taking Channel of Monetary Policy," Working Papers 12-10, Bank of Canada.
  3. Custódio, Cláudia & Ferreira, Miguel A. & Laureano, Luís, 2013. "Why are US firms using more short-term debt?," Journal of Financial Economics, Elsevier, vol. 108(1), pages 182-212.
  4. Jongha Lim & Bernadette A. Minton & Michael Weisbach, 2012. "Syndicated Loan Spreads and the Composition of the Syndicate," NBER Working Papers 18356, National Bureau of Economic Research, Inc.
  5. Dutordoir, Marie & Strong, Norman & Ziegan, Marius C., 2014. "Does corporate governance influence convertible bond issuance?," Journal of Corporate Finance, Elsevier, vol. 24(C), pages 80-100.
  6. Hui Chen & Yu Xu & Jun Yang, 2012. "Systematic Risk, Debt Maturity and the Term Structure of Credit Spreads," Working Papers 12-27, Bank of Canada.
  7. 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.
  8. Arnold, Marc & Hackbarth, Dirk & Puhan, Tatjana-Xenia, 2013. "Financing Asset Sales and Business Cycles," Working Papers on Finance 1320, University of St. Gallen, School of Finance.
  9. Dang, Viet Anh, 2013. "An empirical analysis of zero-leverage firms: New evidence from the UK," International Review of Financial Analysis, Elsevier, vol. 30(C), pages 189-202.

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