Working Paper: NBER ID: w4907
Authors: Kooyul Jung; Yongcheol Kim; Ren M. Stulz
Abstract: With agency costs of managerial discretion, equity financing is advantageous for the shareholders of firms with valuable investment opportunities but not for the shareholders of other firms. Accordingly, we find that firms with good investment opportunities are more likely to issue equity than debt, have a smaller abnormal return in absolute value when the issue is announced, and experience substantial asset growth following the issue. Firms that issue equity even though they do not have good investment opportunities experience a larger abnormal return in absolute value when the issue is announced and invest more after the issue than comparable firms that issue debt.
Keywords: agency costs; equity issuance; debt issuance; managerial discretion
JEL Codes: G32; G31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| good investment opportunities (G11) | equity issuance (G24) |
| poor investment opportunities (G31) | equity issuance (G24) |
| equity issuance (G24) | negative stock price reaction (G14) |
| poor investment opportunities (G31) | larger abnormal returns when announcing equity issues (G14) |