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Capital Market-Driven Corporate Finance

Author

Listed:
  • Malcolm Baker

    (Harvard Business School and NBER, Boston, Massachusetts 02163;)

Abstract

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.

Suggested Citation

  • Malcolm Baker, 2009. "Capital Market-Driven Corporate Finance," Annual Review of Financial Economics, Annual Reviews, vol. 1(1), pages 181-205, November.
    • Handle: RePEc:anr:refeco:v:1:y:2009:p:181-205
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    File URL: http://www.annualreviews.org/doi/abs/10.1146/annurev.financial.050808.114245
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    More about this item

    Keywords

    behavioral finance; limits to arbitrage; market efficiency; securities issuance; supply effects;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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