Capital Market-Driven Corporate Finance

By Malcolm P. Baker. 2009

127 citations recorded by the source corpus.

Much of empirical corporate finance focuses on sources of the demand for various forms of capital, not the supply. Recently, this has changed. Supply effects of equity and credit markets can arise from a combination of three ingredients: investor tastes, limited intermediation, and corporate opportunism. Investor tastes when combined with imperfectly competitive intermediaries lead prices and interest rates to deviate from fundamental values. Opportunistic firms respond by issuing securities with high prices and investing the proceeds. A link between capital market prices and corporate finance can in principle come from either supply or demand. This framework helps to organize empirical approaches that more precisely identify and quantify supply effects through variation in one of these three ingredients. Taken as a whole, the evidence shows that shifting equity and credit market conditions play an important role in dictating corporate finance and investment.

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Citations in the corpus

The Real Consequences of Market Segmentation (2012, result): “In studying the capital supply effects of high-yield fund flows, our work also contributes to the growing literature on market-driven corporate finance, reviewed recently by Baker (2009).”
Institutional demand pressure and the cost of corporate loans (2011, background): “Section 5 See Modigliani and Miller (1958) and Scholes (1972).”
The Business Cycle, Investor Sentiment, and Costly External Finance (2012, unknown): “Taken in their entirety, the investor sentiment results in Table VI are consistent with Baker and Wurlger (2006, 2007) and Baker (2009), who argue that sentiment should have a greater effect on riskier securities.”
Market Timing, Investment, and Risk Management (2012, unknown): “Firms have also become increasingly aware of the risks and opportunities they face with respect to these external financing costs, and they appear to time equity markets as suggested by Baker and Wurgler (2002). However, despite the rapid growth in empirical research on the effects of shocks to the ”
Europe's Second Markets for Small Companies (2012, unknown): “Whether this is corporate opportunism, compensation for risk, or simply good luck is hard to prove (Baker, 2009).”