How economic policy uncertainty affects the cost of raising equity capital: Evidence from seasoned equity offerings

Economic policy uncertainty (EPU) increases the cost of raising equity capital, especially when the economy is weak. A one standard deviation increase in the EPU index developed by Baker, Bloom, and Davis (2016) is associated with a 43 basis point increase in the price discount of seasoned equity of...

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Bibliographic Details
Published in:Journal of financial stability 2021-04, Vol.53, p.100841, Article 100841
Main Authors: Chan, Yue-Cheong, Saffar, Walid, Wei, K.C. John
Format: Article
Language:English
Subjects:
Economic policy uncertainty
Seasoned equity offerings
SEO discounts
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Summary:Economic policy uncertainty (EPU) increases the cost of raising equity capital, especially when the economy is weak. A one standard deviation increase in the EPU index developed by Baker, Bloom, and Davis (2016) is associated with a 43 basis point increase in the price discount of seasoned equity offerings (SEOs) during the 2000−2014 period. The cross-sectional analysis shows that the EPU effect on SEO discounts is stronger for firms with greater dependence on government spending, less informative stock price, or a smaller EPU beta. Moreover, there are fewer SEO activities in periods when there is a high degree of policy uncertainty.
ISSN:1572-3089
1878-0962
DOI:10.1016/j.jfs.2020.100841