Foreign capital raising by Indian firms: An examination of domestic stock price response

We examine the domestic stock price response to foreign capital issuance by Indian firms. Firms have extensively used foreign equity and convertible foreign debt sources since 1994. The role of foreign investment bankers, size of the issue, firm's growth opportunities, and other factors are examined in the cross-sectional analysis of domestic stock price response. We find that firms experience positive stock price response to both equity and debt issues abroad, with greater response to issuance of American Depositary Receipts (ADRs), and financing high corporate growth.     

Investment financing: evidence from Korea

This study examines the relative importance of various forms of capital in financing investments by Korean firms. Our results from the seemingly unrelated regression (SUR) method indicate that, unlike U.S. firms, Korean firms rely substantially on cash holdings to finance investments. These results also suggest that Korean firms use long‐term debt more actively than equity issuance to finance investments. Subgroup analyses show that large firms and Chaebol‐affiliated firms use more long‐term debt but less equity issuance than comparison firms do, suggesting that debt capacity allows firms to reduce the use of equity issuance. However, there is little evidence that financing decisions are driven by information asymmetry. The results from the quantile regression (QR) method suggest that Korean firms tend to use debt capital more than they do equity capital at low and medium levels of investments, while their reliance on equity capital increases at high levels of investments.     

An investigation of the asymmetric link between credit re-ratings and corporate financial decisions: “Flicking the switch” with financial flexibility

Using a large sample of non-financial US listed firms over the period from 1985 to 2009, we analyze the interactive effect of financial flexibility and credit re-ratings on corporate investment and financing decisions. Essentially, we document that financial flexibility (inflexibility) “flicks the switch” in the re-rating upgrades (downgrades) scenario. Specifically, a credit rating upgrade (downgrade) for financially flexible firms is followed by a reduction (no change) in their cost of capital, an increase (no change) in their capital expenditure and an increase (no change) in their net debt versus net equity issuance. In contrast, a rating upgrade (downgrade) for financially inflexible firms is followed by an insignificant change (an increase) in their cost of capital, an insignificant change (a decrease) in their capital expenditure and an insignificant change (a decrease) in their net debt versus net equity issuance. We offer plausible explanations for these asymmetric relations.     

Conglomerate Structure and Capital Market Timing

We examine the effects of keiretsu structure on capital market-timing. Keiretsu groups offer a hybrid structure between fully integrated conglomerates and stand-alone firms. We find that past market conditions affect the capital structure of keiretsu firms more than they affect the capital structure of unaffiliated firms. The decision to issue equity is more correlated with market conditions for keiretsu members than it is for unaffiliated firms. The stock returns of keiretsu firms following the issuance of equity decrease with the size of the issuance. These results suggest that keiretsu members time the issuance of equity more so than stand-alone firms.     

A note on foreigners’ trading and price effects across firms

We study the investment behavior of foreign investors in association with an equity market liberalization, and find a strong link between foreigners’ trading and local market returns. In the period following the liberalization, net purchases by foreign investors induced a permanent increase in stock prices, suggesting that local firms reduced their cost of equity capital. We also find a strong link between a firm’s fraction of foreign ownership and the magnitude of the cost reduction. Foreign investors seem to prefer large and well-known firms, and these firms realize the largest reduction in capital cost. Furthermore, our analysis suggests that foreigners increase their net holding in firms that have recently performed well. Analyzing foreigners’ performance, we find very little evidence of informed trading, suggesting that risk sharing is the most plausible explanation for the reduction of the cost of equity capital.     

Do stock price bubbles influence corporate investment?

Dispersion in investor beliefs and short-selling constraints can lead to stock market bubbles. This paper argues that firms, unlike investors, can exploit such bubbles by issuing new shares at inflated prices. This lowers the cost of capital and increases real investment. Perhaps surprisingly, large bubbles are not eliminated in equilibrium nor do large bubbles necessarily imply large distortions. Using the variance of analysts’ earnings forecasts to proxy for the dispersion of investor beliefs, we find that increases in dispersion cause increases in new equity issuance, Tobin's Q, and real investment, as predicted by the model.     

Access to capital,investment, and the financial crisis

During the recent financial crisis, corporate borrowing and capital expenditures fall sharply. Most existing research links the two phenomena by arguing that a shock to bank lending (or, more generally, to the corporate credit supply) caused a reduction in capital expenditures. The economic significance of this causal link is tenuous, as we find that (1) bank-dependent firms do not decrease capital expenditures more than matching firms in the first year of the crisis or in the two quarters after Lehman Brother's bankruptcy; (2) firms that are unlevered before the crisis decrease capital expenditures during the crisis as much as matching firms and, proportionately, more than highly levered firms; (3) the decrease in net debt issuance for bank-dependent firms is not greater than for matching firms; (4) the average cumulative decrease in net equity issuance is more than twice the average decrease in net debt issuance from the start of the crisis through March 2009; and (5) bank-dependent firms hoard cash during the crisis compared with unlevered firms.     

Access to private equity and real firm activity: Evidence from PIPEs

We study how access to private equity financing affects real firm activities using a broad panel of publicly traded U.S. firms that raise external equity through private placements (PIPEs) between 1995 and 2008. The public firms relying on PIPEs are generally small, high-tech firms that cannot finance investment internally and likely face severe external financing constraints; PIPEs are by far the most important source of finance for these firms. We show that firms use PIPE inflows to maintain extremely high R&D investment ratios and to build substantial cash reserves. We also use GMM techniques that control for firm-specific effects and the endogeneity of the decision to raise private equity and find that PIPE funding has a substantial impact on corporate investment in cash reserves and R&D, and a smaller but significant impact on investment in non-cash working capital, but little impact on fixed investment or acquisitions. Our estimates indicate that R&D investment initially increases by $0.20–$0.25 for each dollar of private equity flowing into the firm, and that PIPE funds initially invested in cash ultimately go to R&D. These findings offer direct evidence that access to private equity finance has an important effect on the key input that drives innovation at the firm- and economy-wide levels.     

Impact of central bank independence and transparency on international equity portfolio allocation: A cross-country analysis

In this study, we analyse the effects of central bank independence (CBI) and central bank transparency (CBT) and their interactions with institutional quality on foreign equity portfolio inflows. Employing a dataset from 42 countries over the period from 2001 to 2014, we find strong evidence that independent and transparent central bank has a positive and significant influence on foreign equity investment inflows. Further analysis shows that institutional quality interacts with central bank independence and transparency in attracting foreign equity portfolio. Our results are robust to alternative specifications, endogeneity concerns and that economic policy uncertainty increases asymmetric information and deters foreign equity portfolio investment inflows.     

Short‐Term Debt as Bridge Financing: Evidence from the Commercial Paper Market

We analyze why firms use nonintermediated short‐term debt by studying the commercial paper (CP) market. Using a comprehensive database of CP issuers and issuance activity, we show that firms use CP to provide start‐up financing for capital investment. Firms’ CP issuance is driven by a desire to minimize transaction costs associated with raising capital for new investment. We show that firms with high rollover risk are less likely to enter the CP market, borrow less CP, and borrow more from bank credit lines. Further, CP is often refinanced with long‐term bond issuance to reduce rollover risk.     

全球投资者国别风险情绪对跨境股票资本流动的影响

本文分析了全球投资者国别风险情绪对跨境股票资本流动的影响,通过构造一般均衡跨期选择模型,刻画了投资者国别风险情绪负向影响跨境股票净资本流入的理论机理以及投资者风险厌恶程度的调节作用,并基于EPFR全球股票型基金微观数据和由大数据文本分析技术构造的全球投资者国别层面风险情绪指标进行实证检验。结果表明:第一,全球投资者对一国的国别风险情绪上升会推升该国的整体风险溢价水平,降低跨境股票型基金净资本流入,尤其是风险厌恶度较高的被动型、开放式和ETF基金;第二,一国金融市场成熟度上升和汇率弹性增强可以缓解全球投资者国别风险情绪对跨境股票型基金净资本流入的负向影响;第三,在全球风险情绪极端低或者各国股票型基金净资本流入极端高的时期,全球投资者国别风险情绪的影响更为显著。     

Venture capital and private equity investors,governance, and success of IPOs: Evidence from India

In this article, we examine the role of domestic and foreign venture capital and private equity (VCPE) firms in India. We find robust evidence that portfolio firms backed by foreign VCPE firms incorporate effective governance structures after the initial public offering (IPO). Specifically, these firms are associated with smaller, more independent, and gender-diverse boards. Furthermore, our results suggest that foreign VCPE firms continue their association with their portfolio firms in the post-IPO period by nominating directors to the boards. Our results also suggest that portfolio firms backed by foreign VCPE firms are associated with better long-term operating performance and profitability. This positive effect is exacerbated by the presence of independent and female directors. Collectively, our results support the view that good governance practices are key to the long-term success of a business, especially in economies that lack good legal systems, developed financial markets, and alternative investment opportunities and where developing trust between parties in a transaction is crucial.     

The long-run performance of firms that issue convertible debt: an empirical analysis of operating characteristics and analyst forecasts

Many firms issue hybrid securities, such as convertible debt, instead of standard securities like straight debt or common equity. Theoretical arguments suggest that convertible debt minimizes costs for firms facing high debt- and equity-related external financing costs. Theory also suggests that an appropriately designed convertible security provides efficient investment incentives. We show, however, that firms on average perform poorly following the issuance of convertible debt. The empirical evidence suggests that the efficient investment decisions predicted by theory are not in fact achieved by the actual design and issuance of convertible debt securities. An alternative interpretation of convertible debt offers is that investors ration the participation of some issuers in the seasoned equity market.     

Securitized markets,international capital flows,and global welfare

We study the effect of collateralized lending and securitization on international capital flows and welfare in a two-country general equilibrium model with idiosyncratic investment risk. The low-margin country (Home) endogenously supplies more safe assets and enables more risk sharing. Upon financial integration, capital flows from Foreign (high-margin country) to Home, leading to lower interest rates and a larger global supply of safe assets. Unlike in standard models with partial equity issuance, in our model, Home can lose from financial integration due to the endogenous reduction in risk sharing and aggregate shocks can generate large gross capital flows.     

Convertible Bond Design and Capital Investment: The Role of Call Provisions

If firms issue convertible securities to facilitate sequential investment, the securities should be engineered to give sufficient flexibility to accommodate timing of follow‐on investment. We examine call provisions in convertible bonds and argue that firms with investment options expected to expire sooner (later) will offer weaker (stronger) call protection. We find that issues with weak or no call protection are offered by firms that invest greater amounts soon after issuance than those issuing convertibles with strong protection. Moreover, capital expenditure levels during the 5‐year period following issuance are inversely related to the length of call‐protection periods.     

Capital Account Openness,International Trade,and Economic Growth: A Cross-Country Empirical Investigation

New empirical estimates of the effects of capital restrictions on growth support capital account liberalization, especially for developed countries. Capital restrictions reduce the benefits of foreign direct investment (FDI) on growth in developing countries. Estimation results for long-term capital flows demonstrate that countries with higher flows grow faster, challenging the belief that countries must attain a threshold level of development or human capital to benefit from capital inflows. Moreover, findings show that trade with developed countries and FDI inflows are substitutes in developing countries. Overall, the results support capital account liberalization in developed and developing countries.     

Payout taxes and the allocation of investment

When corporate payout is taxed, internal equity (retained earnings) is cheaper than external equity (share issues). If there are no perfect substitutes for equity finance, payout taxes may therefore have an effect on the investment of firms. High taxes will favor investment by firms who can finance internally. Using an international panel with many changes in payout taxes, we show that this prediction holds well. Payout taxes have a large impact on the dynamics of corporate investment and growth. Investment is “locked in” in profitable firms when payout is heavily taxed. Thus, apart from any level effects, payout taxes change the allocation of capital.     

The Impact of Global Equity Offerings

This article examines the impact of U.S. firms issuing equity in multiple markets. We compare the stock price reactions to announcements of global equity offers to a control group of issues offered exclusively in the domestic U.S. market. All else equal, the adverse price reaction that typically accompanies equity issuance is reduced by 0.8 percent when some shares are sold abroad. The overall evidence suggests global offers are effective in expanding demand and reducing the price pressure effects associated with share issuance. The beneits of global offers appear to be associated with an increase in the number of foreign shareholders.     

World markets for raising new capital

We examine the extent to which firms from different countries rely on alternative sources of capital, the locations in which they raise capital, and the factors that affect these choices. During the 1990–2001 period, firms raised about $25.3 trillion of new capital, including $4.9 trillion from abroad. International debt issuances are substantially more common than equity issuances, with debt (equity) issues accounting for 87% (9%) of all securities issued internationally, and about 20% (12%) of all public debt issuances. Market timing considerations appear to be important in security issuance decisions in most countries.     

Foreign issuers in the U.S. PIPE market

We document that the use of private investment in public equity (PIPE) by foreign firms listed on U.S. exchanges is growing even faster than its use by U.S. firms. On average, foreign firm PIPE stock deals represent a similar proportion of the firm's market capitalization to U.S. firm PIPEs, but suffer less of a share price discount than U.S. firm PIPE issuances, a relation that is robust to consideration of exchange, deal size, share turnover and return volatility. We document that hedge funds are only small investors in foreign firm PIPEs issued in the U.S., which tend to be purchased by pensions, government funds and corporations. PIPE, in combination with the reverse merger method of going public, provides a cost-effective means for foreign firms to raise capital in the U.S. capital market.