Title

Raising capital under economic uncertainty: an empirical investigation

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.

JEL Codes

C54, D81, E41, G32, G34, P16

Session Theme

Economic Uncertainty and Financial Inclusion - Session IB

Session Type

Parallel Technical Session

Session Chair

Dr. Farooq Arby, Director Research, State Bank of Pakistan

Session Discussant

Dr. Ashraf Khan, Assistant Professor, Institute of Business Administration, Karachi

Start Date

2-4-2021 2:30 PM

End Date

2-4-2021 4:00 PM

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Apr 2nd, 2:30 PM Apr 2nd, 4:00 PM

Raising capital under economic uncertainty: an empirical investigation

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.