Understanding Stock Price Behavior around the Time of Equity Issues

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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.

Published:

• R. Glenn Hubbard, editor. Assymetric Information, Corporate Economy and Investment. Chicago: University of Chicago, 1990. ,
• Korajczyk, Robert A., Deborah J. Lucas and Robert L. McDonald. "Equity Issues With Time-Varying Asymmetric Information," Journal of Financial and Quantitative Analysis, 1992, v27(3), 397-418. ,
• Understanding Stock Price Behavior around the Time of Equity Issues, Robert A. Korajczyk, Deborah Lucas, Robert L. McDonald, in Asymmetric Information, Corporate Finance, and Investment, University of Chicago Press, 1990
  

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