The Choice of Seasoned-equity Selling Mechanism: Theory and Evidence

Abstract:     
Extending the Myers and Majluf (1984) framework, we present a model for the choice of seasoned-equity selling mechanism. A sequential pooling equilibrium exists which implies a positive market reaction to certain flotation strategies. We examine the model implications using the market reaction to issues on the Oslo Stock Exchange using the full range of flotation methods. The average market reaction is non-negative across all methods, and significantly positive for both rights offerings and private placements, as predicted. We also show that average long-run abnormal stock returns to OSE issuers are indistinguishable from zero, supporting the market rationality assumption underpinning the flotation game.

Keywords: Adverse selection, equity offerings, flotation method, rights offer, private placement, underwriting, sequential equilibrium, announcement returns, long-run returns

JEL Classifications: G20, G24, G30, G32

Working Paper Series