A Supply and Demand Approach to Capital Markets

55 Pages Posted: 22 Aug 2019 Last revised: 7 Jan 2022

See all articles by Sebastien Betermier

Sebastien Betermier

McGill University - Desautels Faculty of Management

Laurent E. Calvet

EDHEC Business School - Department of Economics & Finance; CEPR

Evan Jo

McGill University - Desautels Faculty of Management

Multiple version iconThere are 2 versions of this paper

Date Written: January 3, 2022

Abstract

We model capital markets by a parsimonious system of simultaneous linear equations expressing firm-level supply and demand for financial capital. Investor preferences, biases, and risk assessments drive capital supply, while a firm’s profitability and collateralizability drive demand. Firm sizes and capital costs are endogenously determined in general equilibrium. Using theoretically-motivated instruments, we estimate the supply and demand schedules of over 1,200 U.S. firms. We quantify the equilibrium sensitivity of firm size and capital cost to systematic risks, social score, profitability, and asset tangibility. The paper highlights the usefulness of empirical approaches at the intersection of corporate finance and asset pricing.

Keywords: Asset pricing, corporate finance, capital allocation, general equilibrium, factor-based investing, anomalies, production economy, sustainable investing

JEL Classification: G11, G12

Suggested Citation

Betermier, Sebastien and Calvet, Laurent E. and Jo, Evan, A Supply and Demand Approach to Capital Markets (January 3, 2022). Available at SSRN: https://ssrn.com/abstract=3440147 or http://dx.doi.org/10.2139/ssrn.3440147

Sebastien Betermier

McGill University - Desautels Faculty of Management ( email )

1001 Sherbrooke St. West
Montreal, Quebec H3A1G5 H3A 2M1
Canada

Laurent E. Calvet (Contact Author)

EDHEC Business School - Department of Economics & Finance ( email )

France

CEPR ( email )

33 Great Sutton Street
London, EC1V 0DX
United Kingdom

Evan Jo

McGill University - Desautels Faculty of Management ( email )

1001 Sherbrooke St. West
Montreal, Quebec H3A1G5 H3A 2M1
Canada

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