Understanding Stock Price Behavior Around the Time of Equity Issues

40 Pages Posted: 8 Jan 2008 Last revised: 1 Sep 2022

Multiple version iconThere are 2 versions of this paper

Date Written: November 1989

Abstract

It is well-documented that stock prices rise significantly prior to an equity issue, and fall upon announcement of the issue. We expand on earlier studies by using a large sample which includes OTC firms, by examining the cross-sectional properties of the price rise, and by using accounting data to track the pattern of debt ratios and Tobin's q around the time of equity issues. We consider a number of explanations for our results, and conclude that the data is largely consistent with informational models in which managers are asymmetrically informed about the value of the firm. Surprisingly, debt ratios do not increase prior to equity issues, suggesting that strained debt capacity is not the main reason for equity issues. The behavior of Tobin's q is consistent with equity issues being used to finance new investments.

Suggested Citation

Korajczyk, Robert A. and Lucas, Deborah J. and McDonald, Robert L., Understanding Stock Price Behavior Around the Time of Equity Issues (November 1989). NBER Working Paper No. w3170, Available at SSRN: https://ssrn.com/abstract=467624

Robert A. Korajczyk (Contact Author)

Northwestern University - Kellogg School of Management ( email )

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Deborah J. Lucas

Northwestern University - Kellogg School of Management ( email )

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National Bureau of Economic Research (NBER)

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Robert L. McDonald

Northwestern University - Kellogg School of Management ( email )

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