Investment Opportunities, Managerial Decisions, and the Security Issue Decision
Kooyul Jung, Yong-Cheol Kim, Rene M. Stulz
NBER Working Paper No. 4907
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.
Published: Jung, Kooyul, Yong-Cheol Kim and Rene M. Stulz. "Timing, Investment Opportunities, Managerial Discretion, And The Security Issue Decision," Journal of Financial Economics, 1996, v42(2,Oct), 159-185.