Financial Market Volatility and Primary Placements

and investment in particular. Indeed, there is no neat evidence that stock prices af-
fect investment. For instance, Chirinko and Schaller (1996) found that bubbles are
present in the US stock market, but they have no influence on investment, which is
instead driven by fundamentals; Blanchard et al. (1993) conclude that “market val-
uation appears to play a limited role, given fundamentals, in the determination of
investment decisions.”² The above mentioned literature has focused on the analy-
sis of stock prices and investment. But should any relationship between stock and
bond prices (and their volatility) and investment exist, this relationship must take
place through the impact of stock and bond prices on primary placements. Since
firms raise funds by issuing new shares and bonds, and the amount raised depends
on the value of the outstanding shares and bonds, through this channel stock and
bond prices can directly affect their investment decisions. We thus test empirically
if the volatility of stock and bond prices influences the amount of resources that
firms raise from financial markets. The empirical analysis is conducted by taking
into consideration potential endogeneity between the two different sources of ex-
ternal finance. We model stock and bond market volatility as GARCH stochastic
processes and we find that both volatilities do not have any significant impact on
the issuance of stocks and bonds.

²Blanchard et al. (1993), p.132.

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