The Funding through Capital Market and Firm Behavior - Decision-making on IPOs, SEOs and Bond Issues and the Post-funding Investments and R&D Activities

Using a dataset of Japanese firms from the latter half of the 1990s to 2010, we conduct an analysis of the determinants of the funding through initial public offerings (IPOs) by non-listed companies, and the funding through seasoned equity offerings (SEOs) and bond issues by listed companies, as well as the post-funding firm behavior. Our analysis of IPOs shows that firms with higher profitability and soundness are more likely to conduct IPOs, and that the firms that have undertaken IPOs have significantly increased their capital investment and research and development (R&D) activities compared with those that have not. Our results suggest that firms conduct IPOs not only with a view to capitalizing on share mispricing but also to funding their capital investments and R&D activities. Our analysis of SEOs and bond issues by listed companies shows that firms with higher book-to-market ratios and higher leverage ratios issue more equities than bonds and loans, while those with high sales growth rates and higher default probabilities issue more bonds than equities and loans. Our results of equity issues are consistent with the market timing (mispricing) hypothesis as well as the existent theoretical hypothesis of capital structure (the tradeoff and the pecking order hypotheses). On the other hand, while our results of bond issues are consistent with the bank holdup hypothesis, they do not support a hypothesis that stresses the role of banks in renegotiation. Finally, our analysis of the post-funding investment behavior by listed companies shows that bond issues significantly increase firms' capital investments, while the effects of SEOs on capital investments and R&D activities are either insignificant or significant with a limited scale.