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  • Annual Review of Financial Economics

Capital Market-Driven Corporate Finance

By: Malcolm Baker
  • Format:Print
  • | Pages:25
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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.
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About The Author

Malcolm P. Baker

Finance
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  • Leverage and the Beta Anomaly By: Malcolm Baker, Mathias F. Hoeyer and Jeffrey Wurgler
  • Financing the Response to Climate Change: The Pricing and Ownership of U.S. Green Bonds By: Malcolm Baker, Daniel Bergstresser, George Serafeim and Jeffrey Wurgler
  • Detecting Anomalies: The Relevance and Power of Standard Asset Pricing Tests By: Malcolm Baker, Patrick Luo and Ryan Taliaferro
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