A Supply and Demand Approach to Capital Markets

122 Pages Posted: 22 Aug 2019 Last revised: 5 May 2022

See all articles by Sebastien Betermier

Sebastien Betermier

McGill University - Desautels Faculty of Management

Laurent E. Calvet

EDHEC Business School; CEPR

Evan Jo

Queen's University - Smith School of Business; McGill University - Desautels Faculty of Management

Multiple version iconThere are 2 versions of this paper

Date Written: May 5, 2022

Abstract

We model capital markets as 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 other characteristics 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 equilibrium sensitivities of firm size and capital cost to systematic risks, social score, profitability, and asset tangibility. The paper highlights the usefulness of empirical supply and demand systems for 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 (May 5, 2022). Proceedings of Paris December 2021 Finance Meeting EUROFIDAI - ESSEC, 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 ( email )

16 rue du Quatre Septembre
Paris, 75002
France

CEPR ( email )

33 Great Sutton Street
London, EC1V 0DX
United Kingdom

Evan Jo

Queen's University - Smith School of Business ( email )

Smith School of Business - Queen's University
143 Union Street
Kingston, Ontario K7L 3N6
Canada

McGill University - Desautels Faculty of Management ( email )

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

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