SIFR Research Report Series,
Institute for Financial Research

Abstract: 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.

Keywords: Market downturns; Security choice; Maturity; Security

JEL-codes: E00; G32

49 pages, First version: September 17, 2010. Revised: October 26, 2011.

Note: Please find updated version on http://fisher.osu.edu/fin/faculty/weisbach/wpapers.html

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