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Capital Market-Driven Corporate Finance

Author

Listed:
  • Malcolm Baker

    () (Harvard Business School and NBER, Boston, Massachusetts 02163;)

Abstract

Much of empirical corporate finance focuses on sources of the demand for various forms of capital, not the supply. Recently, this has changed. Supply effects of equity and credit markets can arise from a combination of three ingredients: investor tastes, limited intermediation, and corporate opportunism. Investor tastes when combined with imperfectly competitive intermediaries lead prices and interest rates to deviate from fundamental values. Opportunistic firms respond by issuing securities with high prices and investing the proceeds. A link between capital market prices and corporate finance can in principle come from either supply or demand. This framework helps to organize empirical approaches that more precisely identify and quantify supply effects through variation in one of these three ingredients. Taken as a whole, the evidence shows that shifting equity and credit market conditions play an important role in dictating corporate finance and investment.

Suggested Citation

  • Malcolm Baker, 2009. "Capital Market-Driven Corporate Finance," Annual Review of Financial Economics, Annual Reviews, vol. 1(1), pages 181-205, November.
  • Handle: RePEc:anr:refeco:v:1:y:2009:p:181-205
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    File URL: http://www.annualreviews.org/doi/abs/10.1146/annurev.financial.050808.114245
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    Citations

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    Cited by:

    1. Duca, Eric & Dutordoir, Marie & Veld, Chris & Verwijmeren, Patrick, 2012. "Why are convertible bond announcements associated with increasingly negative issuer stock returns? An arbitrage-based explanation," Journal of Banking & Finance, Elsevier, vol. 36(11), pages 2884-2899.
    2. Isil Erel & Brandon Julio & Woojin Kim & Michael S. Weisbach, 2012. "Macroeconomic Conditions and Capital Raising," Review of Financial Studies, Society for Financial Studies, vol. 25(2), pages 341-376.
    3. Robert S. Chirinko & Huntley Schaller, 2011. "Do Bubbles Lead to Overinvestment?: A Revealed Preference Approach," CESifo Working Paper Series 3491, CESifo Group Munich.
    4. 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.
    5. Ramon Moreno & José María Serena Garralda, 2018. "Firms' credit risk and the onshore transmission of the global financial cycle," BIS Working Papers 712, Bank for International Settlements.
    6. Patrick Bolton & Haizhou Huang, 2017. "The Capital Structure of Nations," NBER Working Papers 23612, National Bureau of Economic Research, Inc.
    7. Jotikasthira, Chotibhak & Lundblad, Christian & Ramadorai, Tarun, 2013. "How do foreign investors impact domestic economic activity? Evidence from India and China," Journal of International Money and Finance, Elsevier, vol. 39(C), pages 89-110.
    8. David Hirshleife, 2015. "Behavioral Finance," Annual Review of Financial Economics, Annual Reviews, vol. 7(1), pages 133-159, December.
    9. Adrian Van Rixtel & Luna Romo González & Jing Yang, 2015. "The determinants of long-term debt issuance by European banks: evidence of two crises," BIS Working Papers 513, Bank for International Settlements.
    10. 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.
    11. Zhang, Shage, 2016. "Institutional arrangements and debt financing," Research in International Business and Finance, Elsevier, vol. 36(C), pages 362-372.
    12. Kelly Nianyun Cai & Xiaoquan Jiang & Hei Wai Lee, 2013. "Debt Ipo Waves, Investor Sentiment, Market Conditions, And Issue Quality," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 36(4), pages 435-452, December.
    13. Bolton, Patrick & Huang, Haizhou, 2017. "The Capital Structure of Nations," CEPR Discussion Papers 12157, C.E.P.R. Discussion Papers.
    14. Ivashina, Victoria & Sun, Zheng, 2011. "Institutional demand pressure and the cost of corporate loans," Journal of Financial Economics, Elsevier, vol. 99(3), pages 500-522, March.
    15. 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.

    More about this item

    Keywords

    behavioral finance; limits to arbitrage; market efficiency; securities issuance; supply effects;

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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