Security Issue Announcement Returns and the Choice between Debt and Equity

34 Pages Posted: 3 Nov 2015 Last revised: 12 Aug 2021

See all articles by Tore E. Leite

Tore E. Leite

Norwegian School of Economics (NHH)

Date Written: September 3, 2018

Abstract


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

Leite, Tore E., Security Issue Announcement Returns and the Choice between Debt and Equity (September 3, 2018). Available at SSRN: https://ssrn.com/abstract=2685632 or http://dx.doi.org/10.2139/ssrn.2685632

Tore E. Leite (Contact Author)

Norwegian School of Economics (NHH) ( email )

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