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The Influence Of Predictability On Differences In The Market Reaction To Debt And Equity Issue Announcements

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  • Mark Bayless

Abstract

Existing empirical evidence suggests that the announcement‐day reaction to equity issuance is about 2.88 percent more negative than the reaction to debt. However, announcement‐day returns do not accurately reflect investor reaction if issue announcements are anticipated. I re‐examine the announcement‐day reaction to equity and debt issues after controlling for the predictability of security type and for firms' previous issue experience. Results indicate that the reaction to a first‐time seasoned equity issue is more than 4.15 percent more negative than the reaction to debt. This increase over the conventional estimate suggests that the reaction to equity may be more negative, relative to debt, than previously believed. The evidence supports the assertion that giving preference to debt over equity could reduce issue costs when asymmetric information is a problem. Timing and certification strategies for lowering issue costs appear to be relatively unimportant for debt issues.

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  • Mark Bayless, 1994. "The Influence Of Predictability On Differences In The Market Reaction To Debt And Equity Issue Announcements," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 17(1), pages 117-131, March.
    • Handle: RePEc:bla:jfnres:v:17:y:1994:i:1:p:117-131
    DOI: 10.1111/j.1475-6803.1994.tb00178.x
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    Cited by:

    1. Aigbe Akhigbe & Jeff Madura & Ann Whyte, 2004. "Partial Anticipation and the Gains to Bank Merger Targets," Journal of Financial Services Research, Springer;Western Finance Association, vol. 26(1), pages 55-71, August.
    2. Duy Linh Nguyen & Wolfgang Breuer & Bertram Ingolf Steininger, 2018. "The REIT Debt Puzzle," ERES eres2018_77, European Real Estate Society (ERES).
    3. Jansson, Joakim, 2000. "The Dynamics of External Financing," Working Paper Series 2000:8, Uppsala University, Department of Economics.
    4. Casasola, María José & Tribo Gine, José Antonio, 2002. "Bank debt and market debt: an empirical analysis for Spanish firms," DEE - Working Papers. Business Economics. WB wb020702, Universidad Carlos III de Madrid. Departamento de Economía de la Empresa.

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