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Macroeconomic Conditions and Capital Raising

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  • 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.

Suggested Citation

  • Erel, Isil & Julio, Brandon & Kim, Woojin & Weisbach, Michael S., 2010. "Macroeconomic Conditions and Capital Raising," SIFR Research Report Series 74, Institute for Financial Research, revised 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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    References listed on IDEAS

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    More about this item

    Keywords

    Market downturns; Security choice; Maturity; Security;

    JEL classification:

    • E00 - Macroeconomics and Monetary Economics - - General - - - General
    • 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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