How Economic Policy Uncertainty Affects the Cost of Raising Equity Capital: Evidence from Seasoned Equity Offerings

Abstract

Economic policy uncertainty (EPU) increases the cost of raising equity capital, especially when the economy is weak. A one standard deviation increase in the EPU index developed by Baker, Bloom, and Davis (2016) is associated with a 43 basis point increase in the price discount of seasoned equity offerings (SEOs) during the recent 2000-2014 period. The cross-sectional analysis shows that the EPU effect on SEO discounts is stronger for firms with greater dependence on government spending, less informative stock price, or a smaller EPU beta. Moreover, there are fewer SEO activities in periods when there is a high degree of policy uncertainty.

Keywords: Economic Policy Uncertainty; Seasoned Equity Offerings; SEO Discounts

JEL Classification: G24; G32; G38