Understanding Stock Price Behavior Around the Time of Equity Issues

ASYMMETRIC INFORMATION, CORPORATE FINANCE, AND INVESTMENT, R. Glenn Hubbard, ed., University of Chicago Press, 1990

40 Pages Posted: 21 Oct 2011  

Multiple version iconThere are 2 versions of this paper

Date Written: September 1989

Abstract

The link between the real and financial decisions of firms has been studied for many years, yet it remains poorly understood. Neoclassical investment theories such as Tobin's q posit a direct, simple link between the market's valuation of the firm and investment decisions: firms invest when the market value of an investment exceeds the cost of the investment. For a variety of reasons - agency conflicts between management and security holders, conflicts among security holders, and asymmetric information between management and security holders - the relation between real and financial decisions may be quite complex.

In this paper we study seasoned equity issues as one piece of the corporate financing and investment puzzle. We expect equity issues to be particularly revealing about the role of asymmetric information in financing decisions. First, to the extent that there is asymmetric information between management and outside security holders, the asymmetry should be of greatest concern to potential buyers of common stock since stock is the residual claim on the firm. Second, it is well documented that stocks exhibit large abnormal returns during the period surrounding an equity issue. This suggests that equity issues do in fact reveal valuable information to the market. It is therefore natural to consider whether the price behavior of an equity-issuing firm sheds light on the importance of asymmetric information in the investment process.

Keywords: equity issues, adverse selection, asymmetric information

JEL Classification: G32, G14

Suggested Citation

Korajczyk, Robert A. and Lucas, Deborah J. and McDonald, Robert L., Understanding Stock Price Behavior Around the Time of Equity Issues (September 1989). ASYMMETRIC INFORMATION, CORPORATE FINANCE, AND INVESTMENT, R. Glenn Hubbard, ed., University of Chicago Press, 1990. Available at SSRN: https://ssrn.com/abstract=1947109

Robert A. Korajczyk

Northwestern University - Kellogg School of Management ( email )

Kellogg School of Management
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Evanston, IL 60208
United States
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HOME PAGE: http://www.kellogg.northwestern.edu/faculty/directory/korajczyk_robert.aspx#research

Deborah J. Lucas (Contact Author)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Northwestern University - Kellogg School of Management ( email )

2001 Sheridan Road
Evanston, IL 60208
United States
847-491-8333 (Phone)
847-491-5719 (Fax)

Robert L. McDonald

Northwestern University - Kellogg School of Management ( email )

2001 Sheridan Road
Evanston, IL 60208
United States
847-491-8344 (Phone)
847-491-5719 (Fax)

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