To Deal or not to Deal The Impact of Uncertainty on Corporate Finance Transactions

Sammanfattning: In this paper, we analyze to what extent uncertainty levels have historically impacted corporate finance transaction flows. Over 16 years and 8 countries, we first build an uncertainty index (UIX) and then we put it to work to assess the effect of uncertainty on debt issuance, equity issuance, and mergers and acquisitions. After controlling for factors considered relevant in literature, we find a significant and substantial negative impact on corporate debt issuance and IPOs. We also find that this recess in corporate financing is not explained by fluctuations in investments or loans at the broader economy level. Our interpretation is that uncertainty is a relevant factor only in the cases when delaying or pulling a deal is a feasible option - after considering break-up costs, time constraints and the nature of contracting parties involved. Furthermore, the series affected by uncertainty are the ones where uncertainty-driven activity is more difficult to imagine (e.g. the fire sale of a division). We conclude that uncertainty is a factor that mainly poses problems to the pricing and placement to market of corporate debt and equity initial public offers, as it is mostly relevant for public investors facing information asymmetry.