Equity Issues and Stock Price Dynamics

Authors

  • DEBORAH J. LUCAS,

  • ROBERT L. McDONALD

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    • D. J. Lucas is from Finance Department, Kellogg School, Northwestern University. R. L. McDonald is from Finance Department, Kellogg School, Northwestern University, and NBER. We thank Yuk-Shee Chan, Bruce Grundy, Ravi Jagannathan, Narayana Kocherlakota, Robert Korajczyk, René Stulz, and an anonymous referee for useful comments, as well as seminar participants at Boston College, Northwestern, the University of Chicago, the University of Illinois-Champaign, the University of Southern California, and the NBER working group on Credit Market Imperfections and Economic Activity. We are especially grateful to Robert Korajczyk for his help with the data. This paper was completed while the second author was visiting the Graduate School of Business, University of Chicago.


ABSTRACT

This paper presents an information-theoretic, infinite horizon model of the equity issue decision. The model predicts that (a) equity issues on average are preceded by an abnormal positive return on the stock, although for some firms the issue is preceded by a loss; (b) equity issues on average are preceded by an abnormal rise in the market; and (c) the stock price drops at the announcement of an issue. The model provides a measure of the welfare cost of asymmetric information; the welfare loss may be small even if the price drop at issue announcement is large.

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