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Investment opportunities, free cash flow, and stock valuation effects of secured debt offerings

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Author Info
Shao-Chi Chang ()
Sheng-Syan Chen ()
Ailing Hsing ()
Chia Huang ()
Abstract

This paper examines the role of investment opportunities and free cash flow in explaining the source of the stock valuation effects of secured debt offerings. We find a significantly positive relation between a firm's investment opportunities and its stock price response to announcements of secured debt issues. This evidence supports the investment opportunities hypothesis that secured debt financing is more valuable for issuing firms with high growth opportunities. In contrast, we find a lack of support for the free cash flow hypothesis. These findings hold even after controlling for other potentially influential variables. Our study provides a better understanding of the relative importance of various potential determinants in explaining the variation in the valuation impact of secured debt issues. Copyright Springer Science+Business Media, LLC 2007

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File URL: http://hdl.handle.net/10.1007/s11156-006-0007-6
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Publisher Info
Article provided by Springer in its journal Review of Quantitative Finance and Accounting.

Volume (Year): 28 (2007)
Issue (Month): 2 (February)
Pages: 123-145
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Handle: RePEc:kap:rqfnac:v:28:y:2007:i:2:p:123-145

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Related research
Keywords: Secured debt; Investment opportunities; Free cash flow;

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