Do Bond Market Frictions Impede Equity Financing?
56 Pages Posted: 19 Aug 2019 Last revised: 11 Sep 2022
Date Written: August 14, 2019
Yes. When the secondary bond market prices are made publicly available to equity investors, corporate bond issuers significantly increase their equity financing activity. The increase in equity financing is more pronounced for firms with poorer credit ratings, firms that are not CDS-referenced, and firms that have exhausted their debt capacities. The evidence suggests that information in bond prices mitigates firms’ cost of asymmetric information for equity financing as well. Further, when equity investors can observe bond prices, firms substitute debt financing with more information-sensitive equity financing to restore financial slack. Collectively, these findings are consistent with the pecking order hypothesis of financing and suggest that supply-side frictions that arise in the secondary securities market influence firms’ external financing choices.
Keywords: Dissemination, Market Transparency, TRACE, Equity Financing, Debt Financing, Financial Market Frictions, Capital Structure, Financial Flexibility, Slack
JEL Classification: G34, G32, G35, G38
Suggested Citation: Suggested Citation