Raising capital amid economic policy uncertainty: an empirical investigation

Dawood Ashraf; Mohsin Khawaja; M Ishaq Bhatti

doi:10.1186/s40854-022-00379-w

Raising capital amid economic policy uncertainty: an empirical investigation

Financ Innov. 2022;8(1):74. doi: 10.1186/s40854-022-00379-w. Epub 2022 Aug 15.

Authors

Dawood Ashraf¹, Mohsin Khawaja², M Ishaq Bhatti^{3

4}

Affiliations

¹ Islamic Development Bank Institute (A Member of Islamic Development Bank Group), 8111 King Khalid Street, Jeddah, 22332-2444 Saudi Arabia.
² School of Business Studies, Institute of Business Administration (IBA), Karachi, Pakistan.
³ S P Jain School of Global Management, Sydney, NSW 2141 Australia.
⁴ La Trobe Business School, La Trobe University, Melbourne, Australia.

Abstract

This paper investigates how economic policy uncertainty affects firms' frequency and their choice of financial instruments to raise capital. By applying a three-step sequential framework over a sample of 6834 publicly listed US non-financial firms, we find that during periods of high economic uncertainty, firms raise capital more frequently with a preference toward debt financing. The empirical findings suggest that firms prefer debt financing over equity financing to avoid ownership dilution and high equity premia. The rise in leverage during periods of high economic uncertainty highlights the importance of scrutinizing policy tools used to stabilize the economy during such times.

Keywords: Capital issuance; Debt and equity markets; Economic policy uncertainty; Governance mechanisms; Ownership structure; Political uncertainty.