Do Stock Market Cycles affect Unlisted Firms' Investment Activities?

Abstract

We investigate the impact of stock market cycles on unlisted firms' investment activities. We find that bull markets is associated with increased capital expenditures, new establishments, and employment growth in the unlisted corporate sector, while bear markets is associated with a decrease in these investment activities. The favorable effect takes one year to materialize while the adverse effect takes place contemporaneously. Both effects are transitory and vanish after two years. The effects are stronger for unlisted firms with high capital requirements and facilitated in areas with a dense presence of listed firms. In addition, the magnitude of the effect is attenuated depending on the availability of alternative financing sources such as private equity and bank lending. We also find evidence suggesting stock market cycles partly impact the unlisted firm market through merger and acquisition activities by publicly listed firms.