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Macroeconomic Conditions and the Structure of Securities

Charles A. Dice Center Working Paper No. 2009-6

Fisher College of Business Working Paper No. 2009-03-006

53 Pages Posted: 5 May 2009 Last revised: 27 Oct 2010

Isil Erel

Ohio State University (OSU) - Department of Finance

Brandon Julio

Lundquist College of Business, University of Oregon

Woojin Kim

Seoul National University - Business School

Michael S. Weisbach

Ohio State University (OSU) - Department of Finance; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: October 25, 2010

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. 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.

Keywords: market downturns, security choice, maturity, security

JEL Classification: G32, E00

Suggested Citation

Erel, Isil and Julio, Brandon and Kim, Woojin and Weisbach, Michael S., Macroeconomic Conditions and the Structure of Securities (October 25, 2010). Charles A. Dice Center Working Paper No. 2009-6 ; Fisher College of Business Working Paper No. 2009-03-006. Available at SSRN: https://ssrn.com/abstract=1396355 or http://dx.doi.org/10.2139/ssrn.1396355

Isil Erel

Ohio State University (OSU) - Department of Finance ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States

Brandon Julio

Lundquist College of Business, University of Oregon ( email )

1280 University of Oregon
Eugene, OR 97403
United States

Woojin Kim

Seoul National University - Business School ( email )

Seoul, 151-916
Korea, Republic of (South Korea)
82-2-880-5831 (Phone)

HOME PAGE: http://cba.snu.ac.kr/en/faculty?mode=view&memberidx=60582&major=6

Michael S. Weisbach (Contact Author)

Ohio State University (OSU) - Department of Finance ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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