Hostname: page-component-78c5997874-g7gxr Total loading time: 0 Render date: 2024-11-15T06:52:55.517Z Has data issue: false hasContentIssue false
  • English
  • Français

Market Feedback and Equity Issuance: Evidence from Repeat Equity Issues

Published online by Cambridge University Press:  28 April 2010

Armen Hovakimian  and
Irena Hutton
Armen Hovakimian
Affiliation:
Zicklin School of Business, Baruch College, One Bernard Baruch Way, New York, NY 10010. armen.hovakimian@baruch.cuny.edu
Irena Hutton
Affiliation:
College of Business, Florida State University, Rovetta Business Bldg., Tallahassee, FL 32306. ihutton@cob.fsu.edu
Get access Rights & Permissions [Opens in a new window]

Abstract

Higher first-year post-issue returns are associated with a significantly higher probability of follow-on equity issuance over the next 5 years. This result holds when we control for pre-issue returns and other factors known to affect the probability of equity issuance. The result is most consistent with the market feedback hypothesis that a high post-issue return encourages managers to increase the firm’s investment because it implies that, in the market’s view, the marginal return to the project is high.

Type
Research Articles
Information
Journal of Financial and Quantitative Analysis , Volume 45 , Issue 3 , June 2010 , pp. 739 - 762
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2010

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Alderson, M. J., and Betker, B. L.. “The Long-Run Performance of Companies that Withdraw Seasoned Equity Offerings.” Journal of Financial Research, 23 (2000), 157–178.CrossRefGoogle Scholar
Allen, F., and Faulhaber, G. R.. “Signaling by Underpricing in the IPO Market.” Journal of Financial Economics, 23 (1989), 303–323.CrossRefGoogle Scholar
Almazan, A.; Suarez, J.; and Titman, S.. “Firms’ Stakeholders and the Costs of Transparency.” Journal of Economics and Management Strategy, 18 (2009), 871–900.Google Scholar
Ang, J. S., and Cheng, Y.. “Direct Evidence on the Market-Driven Acquisition Theory.” Journal of Financial Research, 29 (2006), 199–216.CrossRefGoogle Scholar
Baker, M.; Stein, J. C.; and Wurgler, J.. “When Does the Market Matter? Stock Prices and the Investment of Equity-Dependent Firms.” Quarterly Journal of Economics, 118 (2003), 969–1005.CrossRefGoogle Scholar
Baker, M., and Wurgler, J.. “Market Timing and Capital Structure.” Journal of Finance, 57 (2002), 1–32.CrossRefGoogle Scholar
Campello, M., and Graham, J.. “Do Stock Prices Influence Corporate Decisions? Evidence from the Technology Bubble.” Working Paper, University of Illinois at Urbana-Champaign and Duke University (2007).CrossRefGoogle Scholar
Chemmanur, T. J.; He, S.; and Hu, G.. “The Role of Institutional Investors in Seasoned Equity Offerings.” Journal of Financial Economics, 94 (2009), 384–411.CrossRefGoogle Scholar
Chemmanur, T. J., and Jiao, Y.. “Institutional Trading, Information Production, and the SEO Discount: A Model of Seasoned Equity Offerings.” Journal of Economics and Management Strategy, forthcoming (2010).CrossRefGoogle Scholar
Choe, H.; Masulis, R. W.; and Nanda, V.. “Common Stock Offerings across the Business Cycle: Theory and Evidence.” Journal of Empirical Finance, 1 (1993), 3–31.CrossRefGoogle Scholar
Clarke, J.; Dunbar, C.; and Kahle, K. M.. “Long-Run Performance and Insider Trading in Completed and Canceled Seasoned Equity Offerings.” Journal of Financial and Quantitative Analysis, 36 (2001), 415–430.CrossRefGoogle Scholar
Coles, J. L.; Hertzel, M.; and Kalpathy, S.. “Earnings Management around Employee Stock Option Reissues.” Journal of Accounting and Economics, 41 (2006), 173–200.CrossRefGoogle Scholar
Dittmar, A., and Thakor, A.. “Why Do Firms Issue Equity?” Journal of Finance, 62 (2007), 1–54.CrossRefGoogle Scholar
Easterbrook, F. H. “Two Agency-Cost Explanations of Dividends.” American Economic Review, 74 (1984), 650–659.Google Scholar
Fama, E. F., and French, K. R.. “Industry Costs of Equity.” Journal of Financial Economics, 43 (1997), 153–193.CrossRefGoogle Scholar
Fazzari, S. M.; Hubbard, R. G.; and Petersen, B. C.. “Financing Constraints and Corporate Investment.” Brookings Papers on Economic Activity (1988), 141–195.CrossRefGoogle Scholar
Fischer, S., and Merton, R. C.. “Macroeconomics and Finance: The Role of the Stock Market.” Carnegie-Rochester Conference Series on Public Policy, 21 (1984), 57–108.CrossRefGoogle Scholar
Froot, K. A. “Consistent Covariance Matrix Estimation with Cross-Sectional Dependence and Heteroskedasticity in Financial Data.” Journal of Financial and Quantitative Analysis, 24 (1989), 333–355.CrossRefGoogle Scholar
Fulghieri, P., and Lukin, D.. “Information Production, Dilution Costs, and Optimal Security Design.” Journal of Financial Economics, 61 (2001), 3–42.CrossRefGoogle Scholar
Gibson, S.; Safieddine, A.; and Sonti, R.. “Smart Investments by Smart Money: Evidence from Seasoned Equity Offerings.” Journal of Financial Economics, 72 (2004), 581–604.CrossRefGoogle Scholar
Habib, M. A.; Johnsen, D. B.; and Naik, N. Y.. “Spinoffs and Information.” Journal of Financial Intermediation, 6 (1997), 153–176.CrossRefGoogle Scholar
Hill, P., and Hillier, D.. “Market Feedback, Investment Constraints, and Managerial Behavior.” European Financial Management, 15 (2009), 584–605.CrossRefGoogle Scholar
Hovakimian, A. “Are Observed Capital Structures Determined by Equity Market Timing?” Journal of Financial and Quantitative Analysis, 41 (2006), 221–243.CrossRefGoogle Scholar
Hovakimian, A.; Opler, T.; and Titman, S.. “The Debt-Equity Choice.” Journal of Financial and Quantitative Analysis, 36 (2001), 1–24.CrossRefGoogle Scholar
Huber, P. J. “The Behavior of Maximum Likelihood Estimates under Non-Standard Conditions.” Proceedings of the Fifth Berkeley Symposium on Mathematical Statistics and Probability. Berkeley, CA: University of California Press, 1 (1967), 221–233Google Scholar
Jegadeesh, N. “Long-Term Performance of Seasoned Equity Offerings: Benchmark Errors and Biases in Expectations.” Financial Management, 29 (2000), 5–30.CrossRefGoogle Scholar
Jegadeesh, N.; Weinstein, M.; and Welch, I.. “An Empirical Investigation of IPO Returns and Subsequent Equity Offerings.” Journal of Financial Economics, 34 (1993), 153–175.CrossRefGoogle Scholar
Kamstra, M.; Nandy, D.; and Shao, P.. “Do Financing Expectations Affect Firm Performance?” Working Paper, York University and University of Northern British Columbia (2008).CrossRefGoogle Scholar
Keynes, J. M. The General Theory of Employment, Interest, and Money. London, UK: Macmillan (1936).Google Scholar
Lee, C. M. C.; Myers, J.; and Swaminathan, B.. “What is the Intrinsic Value of the Dow?” Journal of Finance, 54 (1999), 1693–1741.CrossRefGoogle Scholar
Lucas, D. J., and McDonald, R. L.. “Equity Issues and Stock Price Dynamics.” Journal of Finance, 45 (1990), 1019–1043.CrossRefGoogle Scholar
Mikkelson, W. H., and Partch, M. M.. “Withdrawn Security Offerings.” Journal of Financial and Quantitative Analysis, 23 (1988), 119–133.CrossRefGoogle Scholar
Purnanandam, A. K., and Swaminathan, B.. “Do Stock Prices Underreact to SEO Announcements? Evidence from SEO Valuation.” Working Paper, University of Michigan and Cornell University (2006).CrossRefGoogle Scholar
Rangan, S. “Earnings Management and the Performance of Seasoned Equity Offerings.” Journal of Financial Economics, 50 (1998), 101–122.CrossRefGoogle Scholar
Rogers, W. “Regression Standard Errors in Clustered Samples.” Stata Technical Bulletin, 13 (1993), 19–23.Google Scholar
Stein, J. C. “Rational Capital Budgeting in an Irrational World.” Journal of Business, 69 (1996), 429–455.CrossRefGoogle Scholar
Stoughton, N. M.; Wong, K. P.; and Zechner, J.. “IPOs and Product Quality.” Journal of Business, 74 (2001), 375–408.CrossRefGoogle Scholar
Subrahmanyam, A., and Titman, S.. “The Going-Public Decision and the Development of Financial Markets.” Journal of Finance, 54 (1999), 1045–1082.CrossRefGoogle Scholar
Teoh, S. H.; Welch, I.; and Wong, T. J.. “Earnings Management and the Underperformance of Seasoned Equity Offerings.” Journal of Financial Economics, 50 (1998), 63–99.CrossRefGoogle Scholar
Van Bommel, J. “Messages from Market to Management: The Case of IPOs.” Journal of Corporate Finance, 8 (2002), 123–138.CrossRefGoogle Scholar
Van Bommel, J., and Vermaelen, T.. “Post-IPO Capital Expenditures and Market Feedback.” Journal of Banking and Finance, 27 (2003), 275–305.CrossRefGoogle Scholar
Welch, I. “Seasoned Offerings, Imitation Costs, and the Underpricing of Initial Public Offerings.” Journal of Finance, 44 (1989), 421–449.CrossRefGoogle Scholar
White, H. “A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity.” Econometrica, 48 (1980), 817–838.CrossRefGoogle Scholar
Williams, R. L. “A Note on Robust Variance Estimation for Cluster-Correlated Data.” Biometrics, 56 (2000), 645–646.CrossRefGoogle ScholarPubMed