Raising capital under economic uncertainty: an empirical investigation
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Abstract/Description
Due to the uncertain geopolitical environment under Covid-19, the demand for debt instruments is rising in the wake of direct intervention by central banks in the capital markets. This paper addresses a timely question, ‘how does economic uncertainty affect the decisions of US firms to raise capital?’ We use a three-step sequential framework to investigate the binary decision of firms to raise capital, their choice of financing instrument, and the subsequent decision about the volume of financing. The simultaneous equation model helps to remove endogenous selection bias and shows that firms implement the three decisions sequentially. Using a sample of 45,635 firm-year records from 6,834 publicly listed US non-financial firms beginning 2000 to 2018, we find that during periods of high economic and political uncertainty, firms raise capital more frequently with a preference toward debt-based instruments. The results of this study provide empirical evidence that economic policy uncertainty stirs demand for capital, particularly for securities with lower ownership dilution risk. In addition, we find that ownership by institutional investors is associated with a tendency to avoid equity financing, supporting the ownership control hypothesis.
Keywords
Economic policy uncertainty, Political uncertainty, Capital issuance, Debt and equity markets, Ownership structure, Governance mechanisms
JEL Codes
C54, D81, E41, G32, G34, P16
Location
Lecture Room 2, 12th Floor, Aman Tower
Session Theme
Economic Uncertainty and Financial Inclusion - Session IB
Session Type
Parallel Technical Session
Session Chair
Dr. Farooq Arbi, Director Research, State Bank of Pakistan
Session Discussant
Dr. Ashraf Khan, Assistant Professor, Institute of Business Administration, Karachi
Panelists
- Dawood Ashraf is a member of the Islamic Development Bank Group, Islamic Research and Training Institute
- M. Ishaq Bhatti is with Department of Economics, Finance and Marketing, La Trobe University. Australia
Start Date
2-4-2021 2:30 PM
End Date
2-4-2021 4:00 PM
Recommended Citation
Ashraf, D., Khawaja, M., & Bhatti, M. (2021). Raising capital under economic uncertainty: an empirical investigation. CBER Conference. Retrieved from https://ir.iba.edu.pk/esdcber/2021/day1/18
Raising capital under economic uncertainty: an empirical investigation
Lecture Room 2, 12th Floor, Aman Tower
Due to the uncertain geopolitical environment under Covid-19, the demand for debt instruments is rising in the wake of direct intervention by central banks in the capital markets. This paper addresses a timely question, ‘how does economic uncertainty affect the decisions of US firms to raise capital?’ We use a three-step sequential framework to investigate the binary decision of firms to raise capital, their choice of financing instrument, and the subsequent decision about the volume of financing. The simultaneous equation model helps to remove endogenous selection bias and shows that firms implement the three decisions sequentially. Using a sample of 45,635 firm-year records from 6,834 publicly listed US non-financial firms beginning 2000 to 2018, we find that during periods of high economic and political uncertainty, firms raise capital more frequently with a preference toward debt-based instruments. The results of this study provide empirical evidence that economic policy uncertainty stirs demand for capital, particularly for securities with lower ownership dilution risk. In addition, we find that ownership by institutional investors is associated with a tendency to avoid equity financing, supporting the ownership control hypothesis.
