Working Paper: NBER ID: w3170
Authors: Robert A. Korajczyk; Robert L. McDonald; Deborah Lucas
Abstract: 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.
Keywords: Stock Price Behavior; Equity Issues; Informational Models
JEL Codes: G14
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| anticipation of equity issues (D84) | stock prices rise significantly prior to an equity issue (G10) |
| announcement of the equity issue (G12) | stock prices fall (G10) |
| equity issuance (G24) | investment financing (G32) |
| strained debt capacity (H63) | decision to issue equity (G24) |
| debt ratios do not increase prior to equity issues (G32) | decision to issue equity (G24) |