![]() As such, this paper addresses three interrelated questions. 2020 Kurtzman and Zeke 2017).īuilding on our initial postulation that firms raise more capital during periods of high economic uncertainty, we hypothesize that the ownership structure of firms plays a significant role in determining the choice of financial instrument to raise capital. 2 However, the intervention of central banks during economic crises 3 through quantitative easing and asset purchase programs and shifts in ownership structure of US firms 4 has altered funding mechanisms and influenced risk-averse firms’ choice of financial instrument toward relatively “safe” bonds and leverage (Giambona et al. 2019 Baker and Wurgler 2002 Myers and Majluf 1984 Jensen and Meckling 1976 Modigliani and Miller 1958 Ross 1977). We posit that when firms operate in an uncertain economic environment, there is an increased demand for capital to mitigate adverse effects brought by the macroeconomic environment.Ĭorporate finance literature offers several explanations about firms’ decision to raise capital and their choice of financing instruments (Haddad and Lotfaliei 2019 Nagar et al. 2019), and elevated risk premia for equity investments (Li 2017 Pástor and Veronesi 2013). 2016), shorter maturities of debt financing (Datta et al. ![]() 2015), wider yield spreads (Bradley et al. 2020), rising financing costs (Waisman et al. Consequences of uncertainty include a decline in business activity (Işık et al. Over the past two decades, firms have operated in an increasingly uncertain economic environment, and financial markets have experienced significant volatility.
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