LONDON: Companies around the world are increasingly turning to equity issuance to raise capital, a sign of growing corporate and investor confidence that could create a virtuous circle for the economy and financial markets.
Both primary and secondary issuance is picking up steam, with Twitter becoming the latest company to announce plans to raise equity in an initial public offering on Thursday.
According to Thomson Reuters data, a total of $491.2bn has been raised in equity capital so far this year, up 17 percent from the same period last year.
Equity financing is sometimes considered a last resort for funding, as a theory known as the “pecking order” states that companies usually prefer internal source of funds from retained earnings and debt for raising capital.
Selling additional stock to investors is also usually negative for share prices because it increases the number of shares outstanding and reduces earnings per share.
But markets are reacting warmly to those who have raised equity or said they will do so.
Shares in social networking website LinkedIn hit a record high on Wednesday, bringing year-to-date gains to around 120 percent, days after it announced plans to raise additional equity capital to fund product development and expansion.
Similarly, shares of US electric carmaker Tesla Motors have risen 93 percent since it raised equity in May.
The trend may reflect growing approval among investors for companies tapping equity markets to finance growth.
They may also welcome the fact that firms remain cautious about leverage, having spent the past few years building up cash buffers amounting to $6.7 trillion.
What is more, increased corporate finance activity on the back of growing confidence could support equity markets and help economic growth in the long run.
Reuters
