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Macroeconomic Conditions and Capital Raising

  • Erel, Isil

    (Ohio State University)

  • Julio, Brandon

    (London Business School)

  • Kim, Woojin

    (Korea University-Business School)

  • Weisbach, Michael S.

    ()

    (Ohio State University)

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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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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  1. Repullo, Rafael & Suarez, Javier, 2000. "Entrepreneurial moral hazard and bank monitoring: A model of the credit channel," European Economic Review, Elsevier, vol. 44(10), pages 1931-1950, December.
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  3. Almeida, Heitor & Campello, Murillo & Weisbach, Michael S., 2011. "Corporate financial and investment policies when future financing is not frictionless," Journal of Corporate Finance, Elsevier, vol. 17(3), pages 675-693, June.
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  12. Zhang, Zhipeng, 2009. "Recovery Rates and Macroeconomic Conditions: The Role of Loan Covenants," MPRA Paper 17521, University Library of Munich, Germany.
  13. Cara S. Lown & Donald P. Morgan & Sonali Rohatgi, 2000. "Listening to loan officers: the impact of commercial credit standards on lending and output," Economic Policy Review, Federal Reserve Bank of New York, issue Jul, pages 1-16.
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