Working Paper: CEPR ID: DP4833
Authors: B. Espen Eckbo; Yvind Norli
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.
Keywords: Adverse Selection; Equity Offering; Flotation Method; Rights Offer; Sequential Equilibrium; Underwriting
JEL Codes: G20; G24; G30; G32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| sequential pooling equilibrium (C62) | positive market reaction (G14) |
| flotation strategies (L10) | positive market reaction (G14) |
| average market reaction (G14) | rights offerings (G24) |
| average market reaction (G14) | private placements (G24) |
| choice of flotation method (C52) | shareholder participation (G34) |
| high current shareholder takeup (G34) | uninsured rights offerings (G52) |
| lower shareholder takeup (G34) | standby underwriting or private placements (G24) |
| average long-run abnormal stock returns (G17) | market rationality assumption (G19) |