Skip to Main Content
HBS Home
  • About
  • Academic Programs
  • Alumni
  • Faculty & Research
  • Baker Library
  • Giving
  • Harvard Business Review
  • Initiatives
  • News
  • Recruit
  • Map / Directions
Faculty & Research
  • Faculty
  • Research
  • Featured Topics
  • Academic Units
  • …→
  • Harvard Business School→
  • Faculty & Research→
Publications
Publications
  • Article
  • Annual Review of Financial Economics

Capital Market-Driven Corporate Finance

By: Malcolm Baker
  • Format:Print
  • | Pages:25
ShareBar

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.

Keywords

Behavioral Finance; Limits To Arbitrage; Market Efficiency; Securities Issuance; Supply Effects; Corporate Finance; Investment; Price; Capital Markets; Equity; Financial Services Industry

Citation

Baker, Malcolm. "Capital Market-Driven Corporate Finance." Annual Review of Financial Economics 1 (2009): 181–205.
  • Find it at Harvard

About The Author

Malcolm P. Baker

Finance
→More Publications

More from the Author

    • November 2022 (Revised December 2022)
    • Faculty Research

    Dicerna

    By: Malcolm Baker, Ishita Sen and Jonathan Wallen
    • 2022
    • Faculty Research

    How Do Investors Value ESG?

    By: Malcolm Baker, Mark Egan and Suproteem K. Sarkar
    • August 2022 (Revised October 2022)
    • Faculty Research

    The Mighty Squirrel Brewery and Taproom

    By: Malcolm Baker
More from the Author
  • Dicerna By: Malcolm Baker, Ishita Sen and Jonathan Wallen
  • How Do Investors Value ESG? By: Malcolm Baker, Mark Egan and Suproteem K. Sarkar
  • The Mighty Squirrel Brewery and Taproom By: Malcolm Baker
ǁ
Campus Map
Harvard Business School
Soldiers Field
Boston, MA 02163
→Map & Directions
→More Contact Information
  • Make a Gift
  • Site Map
  • Jobs
  • Harvard University
  • Trademarks
  • Policies
  • Accessibility
  • Digital Accessibility
Copyright © President & Fellows of Harvard College