Effects of Economic Policy Uncertainty on Decisions to Raise Capital

53 Pages Posted: 14 Jul 2020

See all articles by Dawood Ashraf

Dawood Ashraf

Islamic Development Bank - Islamic Research and Training Institute

Mohsin Khawaja

La Trobe University, Students

Ishaq Bhatti

La Trobe University - School of Economics and Finance; Financial Research Network (FIRN)

Date Written: April 1, 2020

Abstract

This paper investigates how economic policy uncertainty and ownership structure affect the decisions of US firms to raise capital. We use a three-step sequential framework involving the decisions to raise capital and, depending on the decision to raise capital, the choice of financing instrument, and the volume of capital. The simultaneous equation framework not only treats the three decisions sequentially but also removes endogenous selection bias. By using a sample of 45,635 firm-year records of publicly listed non-financial firms for the period starting from 2000 to the end of 2018, we find that during periods of higher economic policy uncertainty, firms engage in external financing more frequently with a preference toward debt-based instruments. In addition, ownership by institutional investors is associated with a tendency to raise capital through debt financing and in lower volumes, supporting ownership control hypothesis. Our results from economic policy uncertainty provide evidence of pecking order theory and market timing theory in raising capital.

Keywords: economic policy uncertainty, ownership structure, capital issuance, equity, debt, corporate governance, simultaneous equation model

JEL Classification: G00

Suggested Citation

Ashraf, Dawood and Khawaja, Mohsin and Bhatti, Ishaq, Effects of Economic Policy Uncertainty on Decisions to Raise Capital (April 1, 2020). Available at SSRN: https://ssrn.com/abstract=3621719 or http://dx.doi.org/10.2139/ssrn.3621719

Dawood Ashraf (Contact Author)

Islamic Development Bank - Islamic Research and Training Institute ( email )

P.O. Box. 9201
Jeddah, 21413
Saudi Arabia

Mohsin Khawaja

La Trobe University, Students ( email )

Wodonga
Australia

Ishaq Bhatti

La Trobe University - School of Economics and Finance ( email )

Bundoora
Melbourne, 3086
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

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