Conditional Event Studies, Anticipation, and Asymmetric Information: The Case of Seasoned Equity Issues and Pre-Issue Information Releases

Abstract

Information disclosed before equity issue announcements could reduce the price drops at the announcements by (1) reducing uncertainty about managers' private information, and/or (2) helping investors to anticipate the equity issues. To distinguish between these effects, we examine the determinants of firms' decisions to issue equity, and develop a conditional event-study procedure, based on Acharya (1988), that distinguishes between anticipation and asymmetric information. This paper explicitly models a firm's equity-issue decision and examines the issue and no-issue choice for U.S. firms during the period of 1980 to 1994. Our results indicate that the timing of stock split, dividend and earnings announcements can help investors to anticipate equity issues. In addition, as predicted by our equity-issue model, we find that equity issues are more likely for larger safer firms with higher debt, less cash, and less internal cash flows. There is also evidence that equity issues are more likely when stock markets are less risky, and after the firms' stock prices' have increased substantially. However, after controlling for anticipation and cross sectional differences in asymmetric information, we find no evidence that split declarations, dividend announcements, or earnings releases decrease the information asymmetry around equity issue announcements.

Keywords: Conditional Event Study, Seasoned equity issues

JEL Classification: G32, G14