Raising capital amid uncertainty about financial market conditions.

• Author: Weisbach, Michael S.
• Position: Research Summaries

The ability of financial markets to provide capital to firms as efficiently as the textbooks describe is an important factor in determining corporate profitability, and economic welfare more broadly. Equally important, the recent Financial Crisis" has shown that financial markets vary substantially over time in their ability to provide capital: sometimes they get "overheated" and provide too much capital, while at other times they slow down and do not provide enough capital. Much of my recent research is related to this topic. I study both the factors that affect firms' access to capital and the implications of uncertain access to capital for corporate behavior.

Factors that Affect Access to Capital

The Financial Crisis substantially reduced firms' ability to access capital markets. Using data from before the Crisis, Isil Erel, Brandon Julio, 'Woojin Kim, and I consider whether this was an isolated occurrence, or an extreme example of a more general phenomenon (1) Do macroeconomic conditions affect firms abilities to raise capital, and if so, how do they affect the manner in which the cap ital is raised? 'We address these questions using a large sample of publicly-traded debt issues, seasoned equity offers, bank loans, and private placements of equity and debt. Our results suggest that a borrower's credit quality significantly affects its ability to raise capital during macroeconomic downturns. For non-investment-grade borrowers, raising capital tends to be pro-cyclical; for investmentgrade borrowers, it is countercyclical. Moreover, the proceeds raised by investment-grade firms are more likely to be held in cash during recessions than in expansions. Poor market conditions also affect the structure of securities offered, shifting them towards shorter maturities and more safety. Overall, our results suggest that macroeconomic conditions influence the securities that firms issue to raise capital, the way in which these securities are structured, and indeed firms' ability to raise capital at all. This influence likely occurs primarily through the effect of macroeconomic conditions on the supply of capital.

The Financial Crisis also made evident the importance of financial innovation, and in particular securitization, in the ability of firms to access capital markets. Taylor Nadauld and I directly estimate the effect of securitization on firms' cost of capital. (2) Our results suggest that loan facilities which are subsequently securitized are associated with a 17-basis-point lower interest cost than loan facilities which are not subsequently securitized. We also consider what characteristics are associated with the likelihood of securitization and then estimate how these characteristics are related to interest rate spreads. Our research shows that Term Loan B facilities, facilities of B-Rated firms, and facilities originated by banks that issue Collateralized Loan Obligations (CLOs) are securitized more frequently than other facilities. The facilities that we estimate to be more likely to be subsequently securitized have lower spreads than otherwise similar facilities. These results are consistent...