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Growth Opportunities and the Stock Price Response to New Financing

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  • Pilotte, Eugene
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    Abstract

    The author documents the effect of growth opportunities on the stock price response to security offerings. For equity offerings, the stock price decline for mature firms exceeds the decline for growth firms. For straight and convertible debt offerings, mature firms experience a significant price decline while growth firms experience no significant price change. Regression analysis indicates that the stock price response to new financing is significantly, positively related to a variety of growth opportunity measures. Holding growth opportunities fixed, the stock price response depends on the type of security offered (equity vs. debt) and, for straight debt offerings, Moody's bond ratings. Copyright 1992 by University of Chicago Press.

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    Bibliographic Info

    Article provided by University of Chicago Press in its journal Journal of Business.

    Volume (Year): 65 (1992)
    Issue (Month): 3 (July)
    Pages: 371-94

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    Handle: RePEc:ucp:jnlbus:v:65:y:1992:i:3:p:371-94

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    Web page: http://www.journals.uchicago.edu/JB/

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    Cited by:
    1. Jong, A. de & Veld, C.H., 1998. "An Empirical Analysis of Incremental Capital Structure Decisions Under Managerial Entrenchment," Discussion Paper, Tilburg University, Center for Economic Research 1998-83, Tilburg University, Center for Economic Research.
    2. Filomena Pietrovito, 2014. "Does financial development help to align growth opportunities with growth? Evidence from industry-level data," Review of World Economics (Weltwirtschaftliches Archiv), Springer, Springer, vol. 150(2), pages 421-442, May.
    3. Joseph F. Brazel & Elizabeth Webb, 2006. "CEO compensation and the seasoned equity offering decision," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 27(5), pages 363-378.
    4. Chung, Kee H. & Wright, Peter & Charoenwong, Charlie, 1998. "Investment opportunities and market reaction to capital expenditure decisions," Journal of Banking & Finance, Elsevier, Elsevier, vol. 22(1), pages 41-60, January.
    5. Lee, Hei Wai, 1997. "Post offering earnings performance of firms that issue seasoned equity: The role of growth opportunities," The Quarterly Review of Economics and Finance, Elsevier, Elsevier, vol. 37(1), pages 97-114.
    6. Jung, Kooyul & Yong-Cheol, Kim & Stulz, Rene M., 1996. "Timing, investment opportunities, managerial discretion, and the security issue decision," Journal of Financial Economics, Elsevier, Elsevier, vol. 42(2), pages 159-185, October.
    7. Korajczyk, Robert A. & Levy, Amnon, 2003. "Capital structure choice: macroeconomic conditions and financial constraints," Journal of Financial Economics, Elsevier, Elsevier, vol. 68(1), pages 75-109, April.
    8. Krishnaswami, Sudha & Yaman, Devrim, 2007. "Contracting costs and the window of opportunity for straight debt issues," Journal of Banking & Finance, Elsevier, Elsevier, vol. 31(3), pages 869-888, March.
    9. Rahman, Manzur & Deshpande, Shreesh, 1997. "Convertible bond calls by multinational and domestic firms: an agency cost perspective," Journal of Multinational Financial Management, Elsevier, Elsevier, vol. 7(1), pages 43-54, April.
    10. Jung, Mookwon & Sullivan, Michael J., 2009. "The signaling effects associated with convertible debt design," Journal of Business Research, Elsevier, Elsevier, vol. 62(12), pages 1358-1363, December.
    11. Kish, Richard J. & Hogan, Karen M. & Olson, Gerard, 1999. "Does the market perceive a difference in rating agencies?," The Quarterly Review of Economics and Finance, Elsevier, Elsevier, vol. 39(3), pages 363-377.
    12. Wu, Xueping & Wang, Zheng, 2005. "Equity financing in a Myers-Majluf framework with private benefits of control," Journal of Corporate Finance, Elsevier, Elsevier, vol. 11(5), pages 915-945, October.
    13. William R. Lane & Mel Jameson, 1993. "Control Preference and Financial Attributes: Founders as CEOs in Small, Publicly Traded Firms," Journal of Entrepreneurial Finance, Pepperdine University, Graziadio School of Business and Management, Pepperdine University, Graziadio School of Business and Management, vol. 3(1), pages 43-62 , Fall.
    14. Walker, Mark D. & Yost, Keven, 2008. "Seasoned equity offerings: What firms say, do, and how the market reacts," Journal of Corporate Finance, Elsevier, Elsevier, vol. 14(4), pages 376-386, September.
    15. Lea Zicchino & Erlend Nier, 2008. "Bank Losses, Monetary Policy and Financial Stability-Evidenceon the Interplay From Panel Data," IMF Working Papers 08/232, International Monetary Fund.
    16. D'Souza, Julia & Jacob, John, 2000. "Why firms issue targeted stock," Journal of Financial Economics, Elsevier, Elsevier, vol. 56(3), pages 459-483, June.
    17. Kato, Hideaki Kiyoshi & Loewenstein, Uri & Tsay, Wenyuh, 2002. "Dividend policy, cash flow, and investment in Japan," Pacific-Basin Finance Journal, Elsevier, Elsevier, vol. 10(4), pages 443-473, September.
    18. Chen, Zhaohui & Mao, Connie X. & Wang, Yong, 2010. "Why firms issue callable bonds: Hedging investment uncertainty," Journal of Corporate Finance, Elsevier, Elsevier, vol. 16(4), pages 588-607, September.
    19. Marisetty, Vijaya B. & Marsden, Alastair & Veeraraghavan, Madhu, 2008. "Price reaction to rights issues in the Indian capital market," Pacific-Basin Finance Journal, Elsevier, Elsevier, vol. 16(3), pages 316-340, June.
    20. Kooyul Jung & Yong-Cheol Kim & Rene M. Stulz, 1994. "Investment Opportunities, Managerial Decisions, and the Security Issue Decision," NBER Working Papers 4907, National Bureau of Economic Research, Inc.
    21. Nayar, Nandkumar (Nandu) & Stock, Duane, 2008. "Make-whole call provisions: A case of "much ado about nothing?"," Journal of Corporate Finance, Elsevier, Elsevier, vol. 14(4), pages 387-404, September.
    22. Ching, Ken M.L. & Firth, Michael & Rui, Oliver M., 2006. "The information content of insider trading around seasoned equity offerings," Pacific-Basin Finance Journal, Elsevier, Elsevier, vol. 14(1), pages 91-117, January.

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