Security Issue Announcement Returns and the Choice between Debt and Equity
34 Pages Posted: 3 Nov 2015 Last revised: 12 Aug 2021
Date Written: September 3, 2018
This paper studies the choice between debt, equity, and not issuing in a model closely related to Myers and Majluf (1984). Only firms with values below an endogenously determined threshold raise capital and hence security offerings will be associated with negative announcement returns. Issuing firms pool by issuing the security with the least negative expected announcement return. Nonetheless, the model implies that debt offerings will be observed empirically with less negative announcement returns compared to equity offers in line with long-standing empirical evidence widely interpreted in support of the pecking order hypothesis.
Keywords: Capital Raising, Asymmetric Information, Announcement Returns, Debt, Equity, Undervinvestment
JEL Classification: G30, G32
Suggested Citation: Suggested Citation