Do Firms Issue More Equity When Markets Are More Liquid?
René M. Stulz
Ohio State University (OSU) - Department of Finance; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI)
Erasmus University Rotterdam (EUR) - Rotterdam School of Management (RSM)
Mathijs A. Van Dijk
Erasmus University - Rotterdam School of Management; Erasmus Research Institute of Management (ERIM)
April 20, 2014
Fisher College of Business Working Paper No. 2013-03-10
Charles A. Dice Center Working Paper No. 2013-10
This paper investigates how public equity issuance is related to stock market liquidity. Using quarterly data on IPOs and SEOs in 36 countries over the period 1995-2008, we show that equity issuance is significantly and positively related to contemporaneous and lagged innovations in aggregate local market liquidity. This relation survives the inclusion of proxies for market timing, capital market conditions, growth prospects, asymmetric information, and investor sentiment. Liquidity considerations are as important in explaining equity issuance as market timing considerations. The relation between liquidity and issuance is driven by the quarters with the greatest deterioration in liquidity and is stronger for IPOs than for SEOs. Firms are more likely to carry out private instead of public equity issues and to postpone public equity issues when market liquidity worsens. Overall, we interpret our findings as supportive of the view that market liquidity is an important determinant of equity issuance that is distinct from other determinants examined to date.
Number of Pages in PDF File: 44
Keywords: International finance, IPOs, SEOs, market liquidity, market timing
JEL Classification: G32, F30, G15
Date posted: July 10, 2013 ; Last revised: April 23, 2014