Cross-Market Timing in Security Issuance

50 Pages Posted: 23 Mar 2011 Last revised: 7 Mar 2013

See all articles by Pengjie Gao

Pengjie Gao

University of Notre Dame - Mendoza College of Business

Dong Lou

London School of Economics & Political Science (LSE); Centre for Economic Policy Research (CEPR)

Date Written: March 6, 2013

Abstract

The conventional view of market timing suggests an unambiguous, negative relation between equity misvaluation and the equity share in new issues - that is, firms with overvalued equity issue more equity and, all else equal, less debt. We question this conventional view in the paper. Using price pressure resulting from mutual funds' flow-induced trading to identify equity misvaluation, we first show that equity and debt prices are affected by the same shocks, but to different degrees. Next, we document substantial cross-sectional variation in the sensitivity of issuance decisions to equity misvaluation. In particular, firms with sufficient internal resources increase equity issues and yet decrease debt issues in our measure of equity misvaluation; in contrast, firms that are heavily dependent on external finance increase both equity and debt issues, to take advantage of the misvaluation in both. In sum, this paper provides evidence that equity and debt can be jointly (mis)priced, and more important, examines the resulting impact on firms' issuance decisions.

Keywords: Debt misvaluation, Market timing, Security issuance, Flow-induced trading

JEL Classification: G12, G14

Suggested Citation

Gao, Pengjie and Lou, Dong, Cross-Market Timing in Security Issuance (March 6, 2013). AFA 2012 Chicago Meetings Paper. Available at SSRN: https://ssrn.com/abstract=1787187 or http://dx.doi.org/10.2139/ssrn.1787187

Pengjie Gao

University of Notre Dame - Mendoza College of Business ( email )

246 Mendoza College of Business
Notre Dame, IN 46556-5646
United States
(574) 631-8048 (Phone)

HOME PAGE: http://​sites.google.com/site/gpengjie/

Dong Lou (Contact Author)

London School of Economics & Political Science (LSE) ( email )

Department of Finance
Houghton Street
London, WC2A 2AE
United Kingdom
+44 (0)207 1075360 (Phone)

HOME PAGE: http://personal.lse.ac.uk/loud/

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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