Working Paper: NBER ID: w16941
Authors: Isil Erel; Brandon Julio; Woojin Kim; Michael S. Weisbach
Abstract: 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.
Keywords: Macroeconomic Conditions; Capital Raising; Corporate Finance
JEL Codes: E00; G21; G32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| macroeconomic conditions (E66) | firms' abilities to raise capital (G32) |
| macroeconomic conditions (E66) | manner of capital raising (G24) |
| macroeconomic conditions (E66) | types of securities firms issue (G24) |
| credit quality of the firm (G32) | capital raising (G24) |
| macroeconomic conditions (E66) | adverse selection costs and asymmetric information (D82) |
| adverse selection costs and asymmetric information (D82) | types of securities firms choose to issue (G24) |
| macroeconomic conditions (E66) | capital raising behavior of non-investment-grade borrowers (G32) |
| macroeconomic conditions (E66) | capital raising behavior of investment-grade borrowers (G24) |
| recessions (E32) | investment-grade firms holding proceeds in cash (G32) |
| poor market conditions (L19) | shorter maturities and more secured debt offerings (G32) |