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The Choice of Seasoned-Equity Selling Mechanism: Theory and Evidence

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  • Eckbo, B Espen
  • Norli, Øyvind

Abstract

Extending the Myers and Majluf (1984) framework, we present a model for the choice of seasoned-equity selling mechanism. A sequential pooling equilibrium exists which implies a positive market reaction to certain flotation strategies. We examine the model implications using the market reaction to issues on the Oslo Stock Exchange using the full range of flotation methods. The average market reaction is non-negative across all methods, and significantly positive for both rights offerings and private placements, as predicted. We also show that average long-run abnormal stock returns to OSE issuers are indistinguishable from zero, supporting the market rationality assumption underpinning the flotation game.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 4833.

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Date of creation: Jan 2005
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Handle: RePEc:cpr:ceprdp:4833

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Keywords: adverse selection; equity offering; flotation method; rights offer; sequential equilibrium; underwriting;

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Cited by:
  1. Miglo, Anton, 2010. "The Pecking Order, Trade-off, Signaling, and Market-Timing Theories of Capital Structure: a Review," MPRA Paper 46691, University Library of Munich, Germany, revised 2013.

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