Common Stock Offerings Across the Business Cycle: Theory and Evidence

Journal of Empirical Finance, Vol. 1, No. 1, pp. 3-31, June 1993 (Lead article, First issue)

35 Pages Posted: 19 May 2006

See all articles by Hyuk Choe

Hyuk Choe

Seoul National University - College of Business Administration

Ronald W. Masulis

University of New South Wales, Sydney; European Corporate Governance Institute (ECGI); Financial Research Network (FIRN); National University of Singapore (NUS) - Asian Bureau of Finance and Economic Research (ABFER)

Vikram K. Nanda

University of Texas at Dallas - School of Management - Department of Finance & Managerial Economics

Abstract

It is well known that historically a larger number of firms issue common stock and the proportion of external financing accounted for by equity is substantially higher in expansionary phases of the business cycle. We show that this phenomenon is consistent with firms selling seasoned equity when they face lower adverse selection costs, which occurs in period with more promising investment opportunities and with less uncertainty about assets in place. Thus, firm announcements of equity issues are predicted to convey less adverse information about equity values in such periods. Empirically, we find evidence that generally supports these predictions. Consistent with historical patterns, firms in recent times have tended to increase equity more frequently in expansionary periods. While business cycle variables are significant explanatory variables, interest rate variables are generally insignificant. The adverse selection effects as measured by the average negative price reaction to seasoned common stock offering announcements is significantly lower in expansionary periods and in periods with a relatively larger volume of equity financing. These offer announcement effects are less negative for smaller stock offerings and for issuers with less uncertainty about assets in place.

Keywords: Seasoned equity offering, SEOs, common stock offers, business cycles, adverse selection, aggregate stock issuance activity

JEL Classification: G32, G24, E30, E32,D92, D82

Suggested Citation

Choe, Hyuk and Masulis, Ronald W. and Nanda, Vikram K., Common Stock Offerings Across the Business Cycle: Theory and Evidence. Journal of Empirical Finance, Vol. 1, No. 1, pp. 3-31, June 1993 (Lead article, First issue) , Available at SSRN: https://ssrn.com/abstract=903156

Hyuk Choe

Seoul National University - College of Business Administration ( email )

Seoul, 151-742
Korea, Republic of (South Korea)
822-880 8257 (Phone)
822-882 0547 (Fax)

Ronald W. Masulis (Contact Author)

University of New South Wales, Sydney ( email )

UNSW Business School
High St
Sydney, NSW 2052
Australia
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612-9385-6347 (Fax)

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
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1000 Brussels
Belgium

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

National University of Singapore (NUS) - Asian Bureau of Finance and Economic Research (ABFER) ( email )

BIZ 2 Storey 4, 04-05
1 Business Link
Singapore, 117592
Singapore

Vikram K. Nanda

University of Texas at Dallas - School of Management - Department of Finance & Managerial Economics ( email )

2601 North Floyd Road
P.O. Box 830688
Richardson, TX 75083
United States