Executive Compensation Structure and Corporate Equity Financing Decisions
Extending Myers and Majluf's (1984) model, we propose the market response to seasoned equity offering (SEO) announcements depends on the alignment of goals of managers and existing shareholders. We document a negative relation between the stock-market response to SEO announcements and issuing firm managers' equity-based compensation (EC). Relative to low-EC managers, the market perceives high-EC managers as issuing more-overvalued equity, benefiting existing shareholders and exacerbating the adverse selection problem for potential shareholders. We find EC and the market reaction to SEOs varies cross-sectionally with information asymmetry, investment opportunities, preissue stock-price run-up, and managerial ownership.
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