Equity Issues with Time-Varying Asymmetric Information

32 Pages Posted: 22 Oct 2011

Date Written: October 1, 1991

Abstract

This paper develops a formal model of the effect of time-varying asymmetric information on the timing and pricing of equity issues when managers are better informed than outside investors. We assume that as time passes, the adverse selection problem becomes more severe as more managers receive a private signal. Under this assumption, the model predicts temporal variation in the quantity of issues, with a bunching of issues after information releases. It also predicts that the price drop at issue announcement increases with the time since the last information release. These predictions are consistent with several recent empirical studies relating equity issues to earnings and dividend announcements.

Keywords: Equity Issues, Adverse Selection, Asymmetric Information

JEL Classification: G32

Suggested Citation

Korajczyk, Robert A. and Lucas, Deborah J. and McDonald, Robert L., Equity Issues with Time-Varying Asymmetric Information (October 1, 1991). Journal of Financial and Quantitative Analysis (JFQA), Vol. 27, No. 3, 1992, Available at SSRN: https://ssrn.com/abstract=1947131

Robert A. Korajczyk

Northwestern University - Kellogg School of Management ( email )

2211 Campus Drive, Room 4357
Evanston, IL 60208-0898
United States
847-491-8336 (Phone)
847-491-7781 (Fax)

HOME PAGE: http://www.kellogg.northwestern.edu/faculty/directory/korajczyk_robert.aspx#research

Deborah J. Lucas

Northwestern University - Kellogg School of Management ( email )

2001 Sheridan Road
Evanston, IL 60208
United States
847-491-8333 (Phone)
847-491-5719 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
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Robert L. McDonald (Contact Author)

Northwestern University - Kellogg School of Management ( email )

2001 Sheridan Road
Evanston, IL 60208
United States
847-491-8344 (Phone)
847-491-5719 (Fax)

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