Macroeconomic Conditions and the Structure of Securities
Ohio State University (OSU) - Department of Finance
University of Oregon
Seoul National University - Business School
Michael S. Weisbach
Ohio State University (OSU) - Department of Finance; National Bureau of Economic Research (NBER)
October 25, 2010
Charles A. Dice Center Working Paper No. 2009-6
Fisher College of Business Working Paper No. 2009-03-006
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. Traditional theory focuses on the demand for capital and suggests that downturns are likely to be associated with a shift in the supply of securities toward less information sensitivity. Alternatively, financing could be affected by supply of capital in terms of both availability of funds and changes in investor preferences during periods of economic uncertainty. We evaluate these hypotheses on a large sample of publicly-traded debt issues, seasoned equity offers, and bank loans. We find that the issuance of convertibles and public bonds, especially those of higher quality, is counter-cyclical, while equity issues and private loans are pro-cyclical. This pattern is consistent with a credit crunch in intermediary capital and a shift towards relatively safe securities during recessions. Moreover, proceeds raised from investment grade bonds 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, these findings suggest that the channel through which macroeconomic conditions affect corporate finance is more likely to be the supply of capital rather than the demand.
Number of Pages in PDF File: 53
Keywords: market downturns, security choice, maturity, security
JEL Classification: G32, E00
Date posted: May 5, 2009 ; Last revised: October 27, 2010
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