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Understanding Stock Price Behavior around the Time of Equity Issues

In: Asymmetric Information, Corporate Finance, and Investment

  • Robert A. Korajczyk
  • Deborah Lucas
  • Robert L. McDonald

It is well-documented that stock prices rise significantly prior to an equity issue, and fall upon announcement of the issue. We expand on earlier studies by using a large sample which includes OTC firms, by examining the cross-sectional properties of the price rise, and by using accounting data to track the pattern of debt ratios and Tobin's q around the time of equity issues. We consider a number of explanations for our results, and conclude that the data is largely consistent with informational models in which managers are asymmetrically informed about the value of the firm. Surprisingly, debt ratios do not increase prior to equity issues, suggesting that strained debt capacity is not the main reason for equity issues. The behavior of Tobin's q is consistent with equity issues being used to finance new investments.

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This chapter was published in:
  • R. Glenn Hubbard, 1990. "Asymmetric Information, Corporate Finance, and Investment," NBER Books, National Bureau of Economic Research, Inc, number glen90-1, August.
  • This item is provided by National Bureau of Economic Research, Inc in its series NBER Chapters with number 11475.
    Handle: RePEc:nbr:nberch:11475
    Contact details of provider: Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
    Phone: 617-868-3900
    Web page: http://www.nber.org
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    1. Lucas, Deborah J & McDonald, Robert L, 1990. " Equity Issues and Stock Price Dynamics," Journal of Finance, American Finance Association, vol. 45(4), pages 1019-43, September.
    2. 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.
    3. Leland, Hayne E & Pyle, David H, 1977. "Informational Asymmetries, Financial Structure, and Financial Intermediation," Journal of Finance, American Finance Association, vol. 32(2), pages 371-87, May.
    4. Mikkelson, Wayne H. & Partch, M. Megan, 1986. "Valuation effects of security offerings and the issuance process," Journal of Financial Economics, Elsevier, vol. 15(1-2), pages 31-60.
    5. Brown, Stephen J. & Warner, Jerold B., 1985. "Using daily stock returns : The case of event studies," Journal of Financial Economics, Elsevier, vol. 14(1), pages 3-31, March.
    6. Scholes, Myron & Williams, Joseph, 1977. "Estimating betas from nonsynchronous data," Journal of Financial Economics, Elsevier, vol. 5(3), pages 309-327, December.
    7. Narayanan, M. P., 1988. "Debt versus Equity under Asymmetric Information," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 23(01), pages 39-51, March.
    8. White, Halbert, 1980. "A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity," Econometrica, Econometric Society, vol. 48(4), pages 817-38, May.
    9. Robert A. Korajczyk & Deborah Lucas & Robert McDonald, 1988. "The Effect of Information Releases on the Pricing and Timing of Equity Issues: Theory and Evidence," NBER Working Papers 2727, National Bureau of Economic Research, Inc.
    10. V.V. Chari & Ravi Jagannathan & Aharon R. Ofer, 1987. "Seasonalities in security returns: the case of earnings announcements," Staff Report 110, Federal Reserve Bank of Minneapolis.
    11. Smith, Clifford Jr., 1977. "Alternative methods for raising capital : Rights versus underwritten offerings," Journal of Financial Economics, Elsevier, vol. 5(3), pages 273-307, December.
    12. Asquith, Paul & Mullins, David Jr., 1986. "Equity issues and offering dilution," Journal of Financial Economics, Elsevier, vol. 15(1-2), pages 61-89.
    13. 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.
    14. Akerlof, George A, 1970. "The Market for 'Lemons': Quality Uncertainty and the Market Mechanism," The Quarterly Journal of Economics, MIT Press, vol. 84(3), pages 488-500, August.
    15. Stephen A. Ross, 1977. "The Determination of Financial Structure: The Incentive-Signalling Approach," Bell Journal of Economics, The RAND Corporation, vol. 8(1), pages 23-40, Spring.
    16. 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.
    17. Scholes, Myron S, 1972. "The Market for Securities: Substitution versus Price Pressure and the Effects of Information on Share Prices," The Journal of Business, University of Chicago Press, vol. 45(2), pages 179-211, April.
    18. Korajczyk, Robert A & Lucas, Deborah J & McDonald, Robert L, 1991. "The Effect of Information Releases on the Pricing and Timing of Equity Issues," Review of Financial Studies, Society for Financial Studies, vol. 4(4), pages 685-708.
    19. 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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