Equity Issuance and Adverse Selection: A Direct Test Using Conditional Stock Offers

J. OF FINANCE, Vol. 52 No. 1, March 1997

Posted: 20 Jan 1997

See all articles by Joel F. Houston

Joel F. Houston

University of Florida - Department of Finance, Insurance and Real Estate

Michael D. Ryngaert

University of Florida - Department of Finance, Insurance and Real Estate

Abstract

We conduct a unique test of adverse selection in the equity issuance process. While common stock is the dominant means of payment in bank mergers, stock acquisition agreements provide target shareholders with varying degrees of protection against adverse price movements in the bidder's stock between the time of the merger agreement and the time of merger completion. We show that it is the degree of protection against adverse price changes and not the percent of stock offered in a bank merger that explains bidder merger announcement abnormal results. This result is difficult to explain outside of an adverse selection framework.

JEL Classification: G34

Suggested Citation

Houston, Joel F. and Ryngaert, Michael David, Equity Issuance and Adverse Selection: A Direct Test Using Conditional Stock Offers. J. OF FINANCE, Vol. 52 No. 1, March 1997. Available at SSRN: https://ssrn.com/abstract=8048

Joel F. Houston (Contact Author)

University of Florida - Department of Finance, Insurance and Real Estate ( email )

P.O. Box 117168
Gainesville, FL 32611
United States

Michael David Ryngaert

University of Florida - Department of Finance, Insurance and Real Estate ( email )

P.O. Box 117168
Gainesville, FL 32611
United States
352-392-9765 (Phone)

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