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Equity Issues, Market Timing, and Limits to Arbitrage

Borja Larrain

Universidad Catolica de Chile

March 18, 2008

We study equity issues when the capacity of the market to absorb risk is limited and time-varying. The model can replicate the dynamics of prices and equity issues observed at the aggregate level. Firms issue equity at high prices and low market returns follow active issuance. In the cross-section, the model predicts that firms with more arbitrage risk are less likely to issue equity. We find empirically that firms with stocks that are harder to arbitrage-stocks with bad substitutes-are less likely to issue equity, issue less equity as fraction of their assets, and have higher leverage.

Number of Pages in PDF File: 59

Keywords: Equity issues, market timing, limits to arbitrage

JEL Classification: G32

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Date posted: March 25, 2008  

Suggested Citation

Larrain, Borja, Equity Issues, Market Timing, and Limits to Arbitrage (March 18, 2008). Available at SSRN: http://ssrn.com/abstract=1108008 or http://dx.doi.org/10.2139/ssrn.1108008

Contact Information

Borja Larrain (Contact Author)
Universidad Catolica de Chile ( email )
Ave. Vicuna Mackenna 4860, Macul
HOME PAGE: http://www.faceapuc.cl/personal/blarrain
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