Business Conditions and Firms’ Financing Decisions
Halil D. Kaya

Abstract
In this study, I examine the impact of business conditions on U.S. firms’ financing decisions. I use the newly developed Aruoba-Diebold-Scotti (i.e. ADS) Business Conditions Index to differentiate between above-average and below-average business condition periods and between improving versus worsening business condition periods. Using a comprehensive sample of 2,510 seasoned equity offerings and 12,144 debt offerings, I find that smaller firms with relatively fewer tangible assets tend to go the financial markets when the business conditions are more favorable. This may be due to the difficulties that these smaller firms experience in financial markets during the unfavorable business condition periods. When I use binary logistic regressions to examine the impact of business conditions on the choice between equity and debt, I find that when business conditions are aboveaverage, debt financing is preferred to equity financing. Interestingly, when business conditions are improving, my results show that equity financing is preferred to debt financing.

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