How do changes in interest rates influence ECM deals?

Rising interest rates can significantly influence equity capital markets (ECM) deals, primarily by increasing borrowing costs. When interest rates rise, companies looking to finance their operations or expansion through debt may find it more expensive to borrow money. This added cost can lead to decreased profitability forecasts, which may make equity financing appear less attractive compared to debt financing. Investors typically seek higher returns when faced with increased borrowing costs, making them more cautious about investing in new equity offerings. Consequently, companies might delay or scale back their equity issuance plans, leading to a slowdown in ECM activity.

Furthermore, as interest rates rise, the risk-free rate also tends to increase, which can result in higher required rates of return for equity investors. This shift can lead to a reduction in demand for new equity issues, resulting in a negative impact on ECM deal volume and pricing.