Working Paper: NBER ID: w12014
Authors: Erica X. N. Li; Dmitry Livdan; Lu Zhang
Abstract: We use a fully-specified neoclassical model augmented with costly external equity as a laboratory to study the relations between stock returns and equity financing decisions. Simulations show that the model can simultaneously and in many cases quantitatively reproduce: procyclical equity issuance; the negative relation between aggregate equity share and future stock market returns; long-term underperformance following equity issuance and the positive relation of its magnitude with the volume of issuance; the mean-reverting behavior in the operating performance of issuing firms; and the positive long-term stock price drift of firms distributing cash and its positive relation with book-to-market. We conclude that systematic mispricing seems unnecessary to generate the return-related evidence often interpreted as behavioral underreaction to market timing.
Keywords: No keywords provided
JEL Codes: E13; E22; E32; E44; G12; G14; G24; G31; G32; G35
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| equity issuance (G24) | stock market returns (G17) |
| economic conditions (E66) | equity issuance (G24) |
| seasoned equity offerings (G24) | non-issuing firms performance (G24) |
| operating performance before equity offerings (G24) | operating performance after equity offerings (G34) |
| cash distribution (G35) | stock performance (G12) |
| capital investment (E22) | future stock returns (G17) |
| cash flows (G19) | capital investment effects (E22) |
| equity issuance (G24) | future stock returns (G17) |