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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
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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

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