Equity Issuance and Returns to Distressed Firms

Abstract:     
Previous literature is inconclusive about whether distressed firms issue equity. Using a portfolio approach to all traded firms, I find a strong positive relationship between distress and equity issuance. When the cross-section of firms is sorted by degree of distress, the mean monthly net issuance rate increases monotonically from 0.10% for the safest decile portfolio to 1.13% for the most distressed. Using a large database that includes both public and private issuance, I find that the hump-shape distribution of public issuance and the monotonically increasing distribution of private issuance together represent the increasing CRSP issuance population in the cross-section of distress. Moreover, I find that the low abnormal returns of distressed firms are concentrated in those firms that issue the most equity. Thus, the positive relationship between equity issuance is important in understanding the equity issuance and return patterns of distressed firms.

Number of Pages in PDF File: 64

Keywords: Distress Anomaly, Equity Issuance, SEO, PIPE, Dilution Effect

JEL Classification: G12, G14, G30, G31, G32, G33

working papers series