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On the Conditioning of the Financial Market’s Reaction to Seasoned Equity Offerings

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  • Onur Arugaslan

    ()
    (Department of Finance and Commercial Law, Haworth College of Business, Western Michigan University, Kalamazoo, Michigan 49008-5420, USA.)

  • Louise Miller

    ()
    (Department of Accounting, College of Business and Technology, Texas A&M University-Commerce, Commerce, Texas 75429, USA.)

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    Abstract

    Consistent with asymmetric information arguments, prior research has shown that the financial market typically responds negatively to the announcement of a seasoned equity offering (SEO). Korajczyk and Levy (2003), however, suggest that while some firms time the issuance of their common stock to take advantage of outside investor overvaluations, financially constrained firms do not. We examine whether prior information on how financially constrained a firm is along with its growth prospects influences the financial market’s response to the firm’s announcement to sell common stock. We find evidence that the financial market does condition its response upon such information using a sample of SEOs from the U.S. Our results also have implications for the financial market’s reaction to SEOs/rights offerings in emerging markets.

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    Bibliographic Info

    Article provided by Department of Economics, The Lahore School of Economics in its journal Lahore Journal of Economics.

    Volume (Year): 11 (2006)
    Issue (Month): 2 (Jul-Dec)
    Pages: 141-154

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    Handle: RePEc:lje:journl:v:11:y:2006:i:2:p:141-154

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    Web page: http://www.lahoreschoolofeconomics.edu.pk/EconomicsJournal/LJEIntro.aspx
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    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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    1. Marco Bigelli, 1998. "The Quasi-split Effect, Active Insiders and the Italian Market Reaction to Equity Rights Issues," European Financial Management, European Financial Management Association, vol. 4(2), pages 185-206.
    2. Myers, Stewart C, 1984. " The Capital Structure Puzzle," Journal of Finance, American Finance Association, vol. 39(3), pages 575-92, July.
    3. Jeffrey A. Wurgler & Malcolm P. Baker, 2001. "Market Timing and Capital Structure," Yale School of Management Working Papers ysm181, Yale School of Management.
    4. Stewart C. Myers & Nicholas S. Majluf, 1984. "Corporate Financing and Investment Decisions When Firms Have InformationThat Investors Do Not Have," NBER Working Papers 1396, National Bureau of Economic Research, Inc.
    5. Myers, Stewart C. & Majluf, Nicholas S., 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Journal of Financial Economics, Elsevier, vol. 13(2), pages 187-221, June.
    6. Myers, Stewart C., 1984. "Capital structure puzzle," Working papers 1548-84., Massachusetts Institute of Technology (MIT), Sloan School of Management.
    7. Hadlock, Charles J & Ryngaert, Michael & Thomas, Shawn, 2001. "Corporate Structure and Equity Offerings: Are There Benefits to Diversification?," The Journal of Business, University of Chicago Press, vol. 74(4), pages 613-35, October.
    8. Brous, Peter A & Kini, Omesh, 1992. "Equity Issues and Tobin's Q: New Evidence Regarding Alternative Information Release Hypotheses," Journal of Financial Research, Southern Finance Association & Southwestern Finance Association, vol. 15(4), pages 323-39, Winter.
    9. La Porta, Rafael & Florencio Lopez-de-Silanes & Andrei Shleifer & Robert W. Vishny, 1997. " Legal Determinants of External Finance," Journal of Finance, American Finance Association, vol. 52(3), pages 1131-50, July.
    10. Nickolaos V. Tsangarakis, 1996. "Shareholder Wealth Effects of Equity Issues in Emerging Markets: Evidence from Rights Offerings in Greece," Financial Management, Financial Management Association, vol. 25(3), Fall.
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    13. Myers, Stewart C. & Majluf, Nicolás S., 1945-, 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Working papers 1523-84., Massachusetts Institute of Technology (MIT), Sloan School of Management.
    14. Brown, Stephen J. & Warner, Jerold B., 1980. "Measuring security price performance," Journal of Financial Economics, Elsevier, vol. 8(3), pages 205-258, September.
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    16. Asquith, Paul & Mullins, David Jr., 1986. "Equity issues and offering dilution," Journal of Financial Economics, Elsevier, vol. 15(1-2), pages 61-89.
    17. Denis, David J. & Sarin, Atulya, 2001. "Is the Market Surprised by Poor Earnings Realizations following Seasoned Equity Offerings?," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 36(02), pages 169-193, June.
    18. Stewart C. Myers, 1984. "Capital Structure Puzzle," NBER Working Papers 1393, National Bureau of Economic Research, Inc.
    19. Denis, David J., 1994. "Investment Opportunities and the Market Reaction to Equity Offerings," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 29(02), pages 159-177, June.
    20. Ranjan D'Mello & Oranee Tawatnuntachai & Devrim Yaman, 2003. "Does the Sequence of Seasoned Equity Offerings Matter?," Financial Management, Financial Management Association, vol. 32(4), Winter.
    21. Masulis, Ronald W. & Korwar, Ashok N., 1986. "Seasoned equity offerings : An empirical investigation," Journal of Financial Economics, Elsevier, vol. 15(1-2), pages 91-118.
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