Template-Type: ReDIF-Paper 1.0
Title: Financial Constraints and the Micro Origins of Aggregate Equity Shocks in Capital Markets
Author-Name: Tobias König
Author-Email: tkoenig@uni-bonn.de
Classification-JEL: E22, E44, G30, G32
Keywords: Capital Markets, External Equity Financing, Granular Instrumental Variable, Financial Constraints

Abstract: 
I examine how financial constraints shape the transmission of aggregate external equity financing shocks to firms' equity issuance, outstanding debt, and
investment. I construct a novel instrument for aggregate equity financing shocks from firm-level data using the Granular Instrumental Variable (GIV) strategy. I
find that financially unconstrained firms--characterized by high cash holdings and dividend-paying status--increase equity issuance by 1.8–2.0 percentage points,
substitute equity for debt, and boost investment when capital market conditions improve. Highly leveraged firms, in contrast, refuse both to issue new equity
and to reduce outstanding debt, consistent with the leverage ratchet effect. The debt overhang of highly leveraged firms results in 1.9 percentage points lower
investment rates compared to the average firm. These results emphasize the crucial role of financial constraints in external equity financing and highlight the
broader macroeconomic implications of debt overhang.

Note: 
Length: 62
Creation-Date: 2025-03
Revision-Date:
File-URL: https://www.crctr224.de/research/discussion-papers/archive/dp675
File-Format: application/pdf
Handle: RePEc:bon:boncrc:CRCTR224_2025_675