Equity Issues, Creditor Control and Market Timing Patterns: Evidence From Leverage Decreasing Recapitalizations

46 Pages Posted: 22 Mar 2017 Last revised: 8 Apr 2022

See all articles by Michael Kisser

Michael Kisser

BI Norwegian Business School

Loreta Rapushi

BI Norwegian Business School

Date Written: February 11, 2022

Abstract

We contribute to the literature on “market timing” by exploring periods of simultaneous equity issues and debt retirements (a leverage decreasing recapitalization, LDR). Contrary to traditional equity issues, LDRs are predicted by measures of creditor control whereas capital investment has no such predictive power. Nevertheless, LDRs occur after stock price run- ups and in periods of high valuation which subsequently decrease. The valuation dynamics are robust and also obtain for subsamples of LDR firms violating financial covenants. A comparison to debt retirements financed by illiquid asset sales and an analysis of discretionary cost items further corroborates the interpretation that LDR firms successfully “time the market” to finance the debt retirement.

Keywords: equity issue; market timing; creditor control; financial reporting conservatism; covenants; pro-forma cash holdings

JEL Classification: G30, G32, G34, M40, M41

Suggested Citation

Kisser, Michael and Rapushi, Loreta, Equity Issues, Creditor Control and Market Timing Patterns: Evidence From Leverage Decreasing Recapitalizations (February 11, 2022). Available at SSRN: https://ssrn.com/abstract=2938579 or http://dx.doi.org/10.2139/ssrn.2938579

Michael Kisser (Contact Author)

BI Norwegian Business School ( email )

Nydalsveien 37
Oslo, 0442
Norway

Loreta Rapushi

BI Norwegian Business School ( email )

Fossåsen 25
Bergen, 5119
Norway

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