Working Paper: NBER ID: w2727
Authors: Robert A. Korajczyk; Deborah Lucas; Robert McDonald
Abstract: This paper develops a formal model of the timing and pricing of new equity issues, assuming that managers are better informed than new investors about the quality of the firm. Firms will prefer to issue equity when the market is most informed about the quality of the firm. This implies that equity issues tend to follow information releases, such as earnings announcements. The model also predicts a relation between the timing and pricing of equity issues. The price drop at the time of the equity issue announcement should increase in the time since the last information release, and the price drop at issue should increase with the time since the last information release or issue announcement. We test the predictions of the theory on a sample of NYSE, AMEX and OTC firms who issued equity over the period 1978-1983. We find evidence that there is a clustering of equity issues following earnings announcements and annual reports, and also that the price drop at the time of the equity issue is increasing in the time since the announcement of the issue.
Keywords: asymmetric information; equity issues; pricing; timing
JEL Codes: G32; G14
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| information releases (G14) | timing of equity issues (G12) |
| time since last information release (G14) | price drop at equity issue announcement (G14) |
| information releases (G14) | price drop at equity issue announcement (G14) |