Annals of the „Constantin Brâncuş i” University of Târgu Jiu, Economy Series, Issue 3/2017 „ACADEMICA BRÂNCUŞI” PUBLISHER, ISSN 2344 – 3685/ISSN-L 1844 - 7007 THE BORROWER CHARACTERISTICS IN HOT EQUITY MARKETS HALIL DINCER KAYA ASSOCIATE PROFESSOR OF FINANCE, NORTHEASTERN STATE UNIVERSITY e-mail: kaya@nsuok.edu Abstract In this study, I examine the characteristics of U.S. corporate borrowers (public debt, private placement, and syndicated loan firms) in HOT versus COLD equity markets. My main objective is to see the characteristics of firms that choose debt financing even when the equity market is HOT. HOT equity markets are defined as the top twenty percent of the months in terms of the de-trended number of equity offerings. I find that the HOT equity market borrowers generally have higher market-to-book ratios compared to the COLD market borrowers. Also, in HOT equity markets, the public debt firms (i.e. the corporate bond issuers) tend to have fewer tangible assets, the private placement firms tend to be smaller and highly levered, and the syndicated loan firms tend to be smaller, more profitable, and less levered compared to the COLD market firms. When I look at the number of transactions in each market, I find that when the equity market is active (i.e. HOT), the syndicated loan market is even more active. During these periods, the public debt market is also active (although not as much as the equity or the syndicated loan markets). When I look at the sizes of the transactions in each market, I find that the private placements tend to be significantly larger in HOT markets compared to COLD markets. I conclude that while the equity, the public debt, and the syndicated loan markets move together in terms of market activity, the equity market and the private placement markets move together in terms of the size of the transaction. Keywords: hot market, equity, debt Clasificare JEL: G30, G32 1. Introduction and context of the study The previous studies on capital structure have shown that firms’ financing decisions are interrelated. For example, Huang and Ritter (2009) show that when the difference between cost of equity and cost of debt gets smaller, the percentage of firms choosing equity financing over debt financing goes up; and when this difference gets larger, the percentage of firms choosing debt financing over equity financing goes up. Elliott, Koeter-Kant, and Warr (2007, 2008) contend that market’s misvaluation of equity explains the debt-equity choice. Interestingly, none of these previous studies is comprehensive enough to cover the equity markets and the three main debt markets, namely the public debt (i.e. corporate bond), the syndicated loan, and the private placement markets, together. As of today, we do not know how each of these markets complements and/or substitutes for each other. For example, do firms see each of these debt markets as a substitute for the equity market? In other words, do managers see a bond offering, a private placement, or a syndicated loan as a perfect alternative to an SEO (i.e. seasoned equity offering)? If not, do firms see these debt markets as a complement of the equity market? In other words, do managers do a bond offering, a private placement, or a syndicated loan to complement an equity offering? Of course, it is possible that some of these debt markets work as a substitute for the equity market and some may be regarded as complementing the equity market. Also, some of these markets may be seen by the managers as a strong substitute for or a strong complement of the equity market, while some may be regarded as a weak substitute for or a weak complement of the equity market. We do not really know how managers see each of these markets in relation to the other markets. 36