Demand Shocks in Equity Markets and Firm Responses

Fernando Broner, Juan Cortina (), Sergio Schmukler and Tomas Williams ()

No 2026-002, Working Papers from The George Washington University, The Center for Economic Research

Abstract: This paper examines how shifts in investor demand influence firm financing and investment decisions. For identification, the paper exploits a large-scale MSCI methodological reform that mechanically redefined the stock weights in major international equity benchmark indexes, changing the portfolio allocation of 2,508 firms across 49 countries. Because benchmark-tracking investors closely follow these indexes, the rebalancing constituted a clean shock to equity demand. The results show that portfolio rebalancing by benchmark-tracking investors generated significant capital inflows and outflows at the firm level. Firms experiencing larger inflows increased equity issuance, even more so debt financing, and real investment. The paper complements the empirical analysis with a simple model of firm financing in which a decline in the cost of equity increases the value of equity and relaxes borrowing constraints. Higher equity valuations allow firms to expand borrowing even without issuing substantial new equity, so debt financing responds more strongly than equity issuance.

Keywords: asset managers; benchmark indexes; corporate debt; equity; investment; institutional investors; issuance activity. (search for similar items in EconPapers)
JEL-codes: F33 G00 G01 G15 G21 G23 G31 (search for similar items in EconPapers)
Pages: 45 pages
Date: 2026-02
New Economics Papers: this item is included in nep-ifn
References: Add references at CitEc
Citations:

Downloads: (external link)
https://www2.gwu.edu/~forcpgm/2026-002.pdf First version, 2026 (application/pdf)

Related works:
Working Paper: Demand Shocks in Equity Markets and Firm Responses (2026)
Working Paper: Demand shocks in equity markets and firm responses (2026)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:gwc:wpaper:2026-002

Access Statistics for this paper

More papers in Working Papers from The George Washington University, The Center for Economic Research Contact information at EDIRC.
Bibliographic data for series maintained by GW Economics Department ().