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Raising capital amid economic policy uncertainty: an empirical investigation

Author

Listed:
  • Dawood Ashraf

    (Islamic Development Bank Institute (A Member of Islamic Development Bank Group))

  • Mohsin Khawaja

    (Institute of Business Administration (IBA))

  • M. Ishaq Bhatti

    (S P Jain School of Global Management
    La Trobe University)

Abstract

This paper investigates how economic policy uncertainty affects firms’ frequency and their choice of financial instruments to raise capital. By applying a three-step sequential framework over a sample of 6834 publicly listed US non-financial firms, we find that during periods of high economic uncertainty, firms raise capital more frequently with a preference toward debt financing. The empirical findings suggest that firms prefer debt financing over equity financing to avoid ownership dilution and high equity premia. The rise in leverage during periods of high economic uncertainty highlights the importance of scrutinizing policy tools used to stabilize the economy during such times.

Suggested Citation

  • Dawood Ashraf & Mohsin Khawaja & M. Ishaq Bhatti, 2022. "Raising capital amid economic policy uncertainty: an empirical investigation," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 8(1), pages 1-32, December.
  • Handle: RePEc:spr:fininn:v:8:y:2022:i:1:d:10.1186_s40854-022-00379-w
    DOI: 10.1186/s40854-022-00379-w
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    More about this item

    Keywords

    Economic policy uncertainty; Political uncertainty; Capital issuance; Debt and equity markets; Ownership structure; Governance mechanisms;
    All these keywords.

    JEL classification:

    • C54 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Quantitative Policy Modeling
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • P16 - Political Economy and Comparative Economic Systems - - Capitalist Economies - - - Capitalist Institutions; Welfare State

    Statistics

    Access and download statistics

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