Understanding Stock Price Behavior around the Time of Equity Issues
Robert A. Korajczyk
Deborah J. Lucas
Robert L. McDonald
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
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