Want to raise capital? Look at the weather forecast

It is the end of June, and the weather is nice (at least it was when I wrote this post). This, it turns out is not just a great time to invest in stock markets but also to raise equity capital.

One of the most famous papers in behavioural finance is “Good Day Sunshine: Stock Returns and the Weather” by David Hirshleifer and Tyler Shumway. It shows that on days when the sun is shining, stock markets tend to perform better than on days when it is overcast. The reason why this is the case is because in good weather, we are in a better mood, and this induces overconfidence and a greater risk appetite in us. Thus, when we are making investment decisions on these days, we are more likely to hit the “Buy” button for equities and prices tend to go up.

But even bigger effects can be achieved if you happen to be the CFO of a company. Assume your business has a major growth opportunity and you want to raise equity capital to finance it. Obviously, it will take a while to get everything ready but when it comes to actually launching the secondary equity offering and soliciting investors for their money, it may be useful to take a look at the weather forecast.  

A team from the University of Portsmouth looked at the prices paid for stocks that are already listed on the stock markets and that are coming to market to raise additional equity capital. Usually, these secondary offers are priced at a discount to the going market price to induce investors to pick up these additional stocks. But how big this discount is depends on the demand from investors.

And – you guessed it – when the weather is sunny, investors are willing to pick additional stocks up at a smaller discount.

What surprised me how big the effect was the researchers found. A one standard deviation increase in sunshine intensity reduced the discount by 2.4% while a one standard deviation drop in sunshine intensity increased the discount by 3.3%. That means if you try to raise $100 million in a secondary offering, the difference between a sunny day and a dreary day is worth more than $5 million in money for the company.

It might sound crazy, but looking at the weather forecast before you raise capital may well be worth a lot of money.