Journal of Corporate Finance Vol. 10 No. 5 2004
Sailing in rough water: market volatility and corporate finance
Abstract
This paper examines how market volatility affects corporate financing transactions. Firms face substantial uncertainty with respect to the price, demand, and after-market costs associated with raising public capital. The ability to effectively hedge this risk is critical to the efficient financing of firm capital needs. Using monthly US equity-related financing transactions from 1970 to 1998, I find that market volatility dampens financing transactions, particularly among small or unseasoned firms. Periods of above normal market volatility are associated with a significant 13% decline in the frequency of initial public offering (IPO) transactions and a 21% decline in the number of IPO dollars raised. Increased market volatility generates greater underwriting fees but does not affect IPO underpricing. The findings are most consistent with Mandelker and Raviv's [J. Finance 32 (1977) 683] model of costly distribution risk bearing.
- DOI
- 10.1016/s0929-1199(03)00045-2
- Volume
- 10
- Issue
- 5
- Pages
- 659-681
- Language
- en
- Sources
- openalex crossref bibtex:phds-export.bib