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Macroeconomic Conditions and Capital Raising

  • Isil Erel
  • Brandon Julio
  • Woojin Kim
  • Michael S. Weisbach

Do macroeconomic conditions affect firms' abilities to raise capital? If so, how do they affect the manner in which the capital is raised? We address these questions using a large sample of publicly-traded debt issues, seasoned equity offers, bank loans and private placements of equity and debt. Our results suggest that a borrower's credit quality significantly affects its ability to raise capital during macroeconomic downturns. For noninvestment-grade borrowers, capital raising tends to be procyclical while for investment-grade borrowers, it is countercyclical. Moreover, proceeds raised by investment grade firms are more likely to be held in cash in recessions than in expansions. Poor market conditions also affect the structure of securities offered, shifting them towards shorter maturities and more security. Overall, our results suggest that macroeconomic conditions influence the securities that firms issue to raise capital, the way in which these securities are structured and indeed firms' ability to raise capital at all. This influence likely occurs primarily through the effect of macroeconomic conditions on the supply of capital.

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File URL: http://www.nber.org/papers/w16941.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 16941.

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Date of creation: Apr 2011
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Publication status: published as 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.
Handle: RePEc:nbr:nberwo:16941
Note: AP CF IFM ME
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