IDEAS home Printed from https://ideas.repec.org/a/bla/eufman/v25y2019i3p489-519.html
   My bibliography  Save this article

Equity issues when in distress

Author

Listed:
  • Mark D. Walker
  • Qingqing Wu

Abstract

We investigate the role of financial distress in the seasoned equity market. We find that distressed firms comprise about 40% of SEOs and these distressed issuers have worse abnormal announcement returns than non‐distressed issuers. Stock return volatility is an important determinant for announcement returns for non‐distressed SEO issuers but not for distressed SEO issuers. Signals of firm quality are associated with better announcement returns, larger issues, increased investment, improved operating performance, and lower likelihood of delisting for distressed SEO firms as compared to non‐distressed firms. Our findings suggest equity finance is valuable for financially distressed firms with strong growth prospects.

Suggested Citation

  • Mark D. Walker & Qingqing Wu, 2019. "Equity issues when in distress," European Financial Management, European Financial Management Association, vol. 25(3), pages 489-519, June.
    • Handle: RePEc:bla:eufman:v:25:y:2019:i:3:p:489-519
    DOI: 10.1111/eufm.12220
    as

    Download full text from publisher

    File URL: https://doi.org/10.1111/eufm.12220
    Download Restriction: no
    File URL: https://libkey.io/10.1111/eufm.12220?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Hertzel, Michael G. & Li, Zhi, 2010. "Behavioral and Rational Explanations of Stock Price Performance around SEOs: Evidence from a Decomposition of Market-to-Book Ratios," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 45(4), pages 935-958, August.
    2. repec:bla:jfinan:v:59:y:2004:i:2:p:623-650 is not listed on IDEAS
    3. Philippe Aghion & John Van Reenen & Luigi Zingales, 2013. "Innovation and Institutional Ownership," American Economic Review, American Economic Association, vol. 103(1), pages 277-304, February.
    4. Denis, David J., 1994. "Investment Opportunities and the Market Reaction to Equity Offerings," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 29(2), pages 159-177, June.
    5. Brav, Alon & Geczy, Christopher & Gompers, Paul A., 2000. "Is the abnormal return following equity issuances anomalous?," Journal of Financial Economics, Elsevier, vol. 56(2), pages 209-249, May.
    6. Elliott, William B. & Prevost, Andrew K. & Rao, Ramesh P., 2009. "The announcement impact of seasoned equity offerings on bondholder wealth," Journal of Banking & Finance, Elsevier, vol. 33(8), pages 1472-1480, August.
    7. Gao, Xiaohui & Ritter, Jay R., 2010. "The marketing of seasoned equity offerings," Journal of Financial Economics, Elsevier, vol. 97(1), pages 33-52, July.
    8. Loughran, Tim & Ritter, Jay R, 1995. "The New Issues Puzzle," Journal of Finance, American Finance Association, vol. 50(1), pages 23-51, March.
    9. Gibson, Scott & Safieddine, Assem & Sonti, Ramana, 2004. "Smart investments by smart money: Evidence from seasoned equity offerings," Journal of Financial Economics, Elsevier, vol. 72(3), pages 581-604, June.
    10. Lemmon, Michael L. & Zender, Jaime F., 2010. "Debt Capacity and Tests of Capital Structure Theories," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 45(5), pages 1161-1187, October.
    11. Edward I. Altman, 1968. "Financial Ratios, Discriminant Analysis And The Prediction Of Corporate Bankruptcy," Journal of Finance, American Finance Association, vol. 23(4), pages 589-609, September.
    12. Malcolm Baker & Jeffrey Wurgler, 2000. "The Equity Share in New Issues and Aggregate Stock Returns," Journal of Finance, American Finance Association, vol. 55(5), pages 2219-2257, October.
    13. Palani-Rajan Kadapakkam & Alex Meisami & John K. Wald, 2016. "The Debt Trap: Wealth Transfers and Debt-Equity Choices of Junk-Grade Firms," The Financial Review, Eastern Finance Association, vol. 51(1), pages 5-35, February.
    14. John Y. Campbell & Jens Hilscher & Jan Szilagyi, 2008. "In Search of Distress Risk," Journal of Finance, American Finance Association, vol. 63(6), pages 2899-2939, December.
    15. David Aboody & Baruch Lev, 2000. "Information Asymmetry, R&D, and Insider Gains," Journal of Finance, American Finance Association, vol. 55(6), pages 2747-2766, December.
    16. repec:bla:jfinan:v:55:y:2000:i:4:p:1655-1703 is not listed on IDEAS
    17. E. Han Kim & Amiyatosh Purnanandam, 2014. "Seasoned Equity Offerings, Corporate Governance, and Investments," Review of Finance, European Finance Association, vol. 18(3), pages 1023-1057.
    18. Masulis, Ronald W. & Korwar, Ashok N., 1986. "Seasoned equity offerings : An empirical investigation," Journal of Financial Economics, Elsevier, vol. 15(1-2), pages 91-118.
    19. Brockman, Paul & Turtle, H. J., 2003. "A barrier option framework for corporate security valuation," Journal of Financial Economics, Elsevier, vol. 67(3), pages 511-529, March.
    20. Bayless, Mark & Jay, Nancy R., 2003. "Is the performance of firms following seasoned equity issues anomalous?," Journal of Banking & Finance, Elsevier, vol. 27(7), pages 1273-1296, July.
    21. Edward I. Altman, 1968. "The Prediction Of Corporate Bankruptcy: A Discriminant Analysis," Journal of Finance, American Finance Association, vol. 23(1), pages 193-194, March.
    22. Falkenstein, Eric G, 1996. "Preferences for Stock Characteristics as Revealed by Mutual Fund Portfolio Holdings," Journal of Finance, American Finance Association, vol. 51(1), pages 111-135, March.
    23. Ohlson, Ja, 1980. "Financial Ratios And The Probabilistic Prediction Of Bankruptcy," Journal of Accounting Research, Wiley Blackwell, vol. 18(1), pages 109-131.
    24. Charles J. Hadlock & Joshua R. Pierce, 2010. "New Evidence on Measuring Financial Constraints: Moving Beyond the KZ Index," The Review of Financial Studies, Society for Financial Studies, vol. 23(5), pages 1909-1940.
    25. repec:bla:jfinan:v:53:y:1998:i:3:p:1131-1147 is not listed on IDEAS
    26. Philipp Jostarndt, 2009. "Equity Offerings in Financial Distress – Evidence from German Restructurings," Schmalenbach Business Review (sbr), LMU Munich School of Management, vol. 61(1), pages 84-111, January.
    27. Del Guercio, Diane, 1996. "The distorting effect of the prudent-man laws on institutional equity investments," Journal of Financial Economics, Elsevier, vol. 40(1), pages 31-62, January.
    28. Dutordoir, Marie & Strong, Norman C. & Sun, Ping, 2018. "Corporate social responsibility and seasoned equity offerings," Journal of Corporate Finance, Elsevier, vol. 50(C), pages 158-179.
    29. Russ Wermers, 2000. "Mutual Fund Performance: An Empirical Decomposition into Stock‐Picking Talent, Style, Transactions Costs, and Expenses," Journal of Finance, American Finance Association, vol. 55(4), pages 1655-1695, August.
    30. Jung, Kooyul & Yong-Cheol, Kim & Stulz, Rene M., 1996. "Timing, investment opportunities, managerial discretion, and the security issue decision," Journal of Financial Economics, Elsevier, vol. 42(2), pages 159-185, October.
    31. Parrino, Robert & Sias, Richard W. & Starks, Laura T., 2003. "Voting with their feet: institutional ownership changes around forced CEO turnover," Journal of Financial Economics, Elsevier, vol. 68(1), pages 3-46, April.
    32. Bayless, Mark & Chaplinsky, Susan, 1991. "Expectations of security type and the information content of debt and equity offers," Journal of Financial Intermediation, Elsevier, vol. 1(3), pages 195-214, June.
    33. Malcolm Baker & Jeffrey Wurgler, 2002. "Market Timing and Capital Structure," Journal of Finance, American Finance Association, vol. 57(1), pages 1-32, February.
    34. Murray Carlson & Adlai Fisher & Ron Giammarino, 2006. "Corporate Investment and Asset Price Dynamics: Implications for SEO Event Studies and Long‐Run Performance," Journal of Finance, American Finance Association, vol. 61(3), pages 1009-1034, June.
    35. Shane A. Corwin, 2003. "The Determinants of Underpricing for Seasoned Equity Offers," Journal of Finance, American Finance Association, vol. 58(5), pages 2249-2279, October.
    36. Matthias Kahl, 2002. "Economic Distress, Financial Distress, and Dynamic Liquidation," Journal of Finance, American Finance Association, vol. 57(1), pages 135-168, February.
    37. Mark D. Walker & Keven Yost & Jing Zhao, 2016. "Credibility and Multiple SEOs: What Happens When Firms Return to the Capital Market?," Financial Management, Financial Management Association International, vol. 45(3), pages 675-703, August.
    38. Altı, Aydoğan & Sulaeman, Johan, 2012. "When do high stock returns trigger equity issues?," Journal of Financial Economics, Elsevier, vol. 103(1), pages 61-87.
    39. Loughran, Tim & Ritter, Jay R, 1997. "The Operating Performance of Firms Conducting Seasoned Equity Offerings," Journal of Finance, American Finance Association, vol. 52(5), pages 1823-1850, December.
    40. Moreno-Bromberg, Santiago & Vo, Quynh-Anh, 2017. "Resolution of financial distress under agency frictions," Journal of Banking & Finance, Elsevier, vol. 82(C), pages 40-58.
    41. Ai, Chunrong & Norton, Edward C., 2003. "Interaction terms in logit and probit models," Economics Letters, Elsevier, vol. 80(1), pages 123-129, July.
    42. repec:bla:jfinan:v:59:y:2004:i:4:p:1777-1804 is not listed on IDEAS
    43. Bilinski, Pawel & Liu, Weimin & Strong, Norman, 2012. "Does liquidity risk explain low firm performance following seasoned equity offerings?," Journal of Banking & Finance, Elsevier, vol. 36(10), pages 2770-2785.
    44. Lee, Gemma & Masulis, Ronald W., 2009. "Seasoned equity offerings: Quality of accounting information and expected flotation costs," Journal of Financial Economics, Elsevier, vol. 92(3), pages 443-469, June.
    45. Walker, Mark D. & Yost, Keven, 2008. "Seasoned equity offerings: What firms say, do, and how the market reacts," Journal of Corporate Finance, Elsevier, vol. 14(4), pages 376-386, September.
    46. Rhodes-Kropf, Matthew & Robinson, David T. & Viswanathan, S., 2005. "Valuation waves and merger activity: The empirical evidence," Journal of Financial Economics, Elsevier, vol. 77(3), pages 561-603, September.
    47. Myers, Stewart C., 1977. "Determinants of corporate borrowing," Journal of Financial Economics, Elsevier, vol. 5(2), pages 147-175, November.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Mark D. Walker & Qingqing Wu, 2024. "PIPEs, firm investment, and viability," Review of Quantitative Finance and Accounting, Springer, vol. 62(1), pages 171-194, January.
    2. Prasad, Mason & Bakry, Walid & Varua, Maria Estela, 2021. "Abnormal volatility in seasoned equity offerings during economic disruptions," Journal of Behavioral and Experimental Finance, Elsevier, vol. 30(C).
    3. Avignone, Giuseppe & Altunbas, Yener & Polizzi, Salvatore & Reghezza, Alessio, 2021. "Centralised or decentralised banking supervision? Evidence from European banks," Journal of International Money and Finance, Elsevier, vol. 110(C).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Dutordoir, Marie & Strong, Norman C. & Sun, Ping, 2018. "Corporate social responsibility and seasoned equity offerings," Journal of Corporate Finance, Elsevier, vol. 50(C), pages 158-179.
    2. He Xiao & Jianqun Xi, 2021. "The impact of COVID‐19 on seasoned equity offering: Evidence from China," Pacific Economic Review, Wiley Blackwell, vol. 26(4), pages 539-572, October.
    3. He, Yan & Wang, Junbo & John Wei, K.C., 2014. "A comprehensive study of liquidity before and after SEOs and SEO underpricing," Journal of Financial Markets, Elsevier, vol. 20(C), pages 61-78.
    4. DeAngelo, Harry & DeAngelo, Linda & Stulz, René M., 2010. "Seasoned equity offerings, market timing, and the corporate lifecycle," Journal of Financial Economics, Elsevier, vol. 95(3), pages 275-295, March.
    5. Bhuyan, Md Nazmul Hasan & Subedi, Meena & Akter, Maimuna, 2022. "CEO-friendly boards and seasoned equity offerings," Journal of Behavioral and Experimental Finance, Elsevier, vol. 36(C).
    6. (Grace) Qing Hao, 2014. "Institutional Shareholder Investment Horizons and Seasoned Equity Offerings," Financial Management, Financial Management Association International, vol. 43(1), pages 87-111, March.
    7. DeAngelo, Harry & DeAngelo, Linda & Stulz, Rene, 2007. "Fundamentals, Market Timing, and Seasoned Equity Offerings," Working Paper Series 2007-13, Ohio State University, Charles A. Dice Center for Research in Financial Economics.
    8. Lan, Yueqin & Huang, Yong & Yan, Chao, 2021. "Investor sentiment and stock price: Empirical evidence from Chinese SEOs," Economic Modelling, Elsevier, vol. 94(C), pages 703-714.
    9. Huang, Yong & Uchida, Konari & Zha, Daolin, 2016. "Market timing of seasoned equity offerings with long regulative process," Journal of Corporate Finance, Elsevier, vol. 39(C), pages 278-294.
    10. Barclay, Michael J. & Fu, Fangjian & Smith, Clifford W., 2021. "Seasoned equity offerings and corporate financial management," Journal of Corporate Finance, Elsevier, vol. 66(C).
    11. Pawel Bilinski & Abdulkadir Mohamed, 2015. "The Signaling Effect of Durations between Equity and Debt Issues," Financial Markets, Institutions & Instruments, John Wiley & Sons, vol. 24(2-3), pages 159-190, May.
    12. Liu, Yang & Yang, J. Jimmy, 2011. "Private debt, unused credit lines, and seasoned equity offerings," The Quarterly Review of Economics and Finance, Elsevier, vol. 51(4), pages 376-388.
    13. Mark D. Walker & Keven Yost, 2022. "Seasoned equity offerings and payout policy," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 45(3), pages 695-718, September.
    14. Cline, Brandon N. & Garner, Jacqueline L. & Yore, Adam S., 2014. "Exploitation of the internal capital market and the avoidance of outside monitoring," Journal of Corporate Finance, Elsevier, vol. 25(C), pages 234-250.
    15. Walker, Mark D. & Yost, Keven, 2008. "Seasoned equity offerings: What firms say, do, and how the market reacts," Journal of Corporate Finance, Elsevier, vol. 14(4), pages 376-386, September.
    16. Altı, Aydoğan & Sulaeman, Johan, 2012. "When do high stock returns trigger equity issues?," Journal of Financial Economics, Elsevier, vol. 103(1), pages 61-87.
    17. Bradley, Daniel & Yuan, Xiaojing, 2013. "Information spillovers around seasoned equity offerings," Journal of Corporate Finance, Elsevier, vol. 21(C), pages 106-118.
    18. Cai, Jie & Zhang, Zhe, 2011. "Leverage change, debt overhang, and stock prices," Journal of Corporate Finance, Elsevier, vol. 17(3), pages 391-402, June.
    19. Frank D’Souza & Harold Fletcher & Octavian Ionici, 2011. "Equity Market Timing And Subsequent Delisting Likelihood," The International Journal of Business and Finance Research, The Institute for Business and Finance Research, vol. 5(2), pages 85-94.
    20. Wadhwa, Kavita & Neupane, Suman & Syamala, Sudhakara Reddy, 2019. "Do group-affiliated firms time their equity offerings?," Pacific-Basin Finance Journal, Elsevier, vol. 54(C), pages 73-92.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bla:eufman:v:25:y:2019:i:3:p:489-519. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Wiley Content Delivery (email available below). General contact details of provider: https://edirc.repec.org/data/efmaaea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.