This paper investigates how the market reaction to debt and equity offers is influenced by investors' expectations as to the type of security to be issued. We find a significantly positive 1% announcement day return for debt issues made by firms that would normally be expected to issue equity. In contrast, the market reacts negatively when firms that are expected to issue debt issue equity instead. These results suggest that the informational content of public security offerings is conditioned by investors' prior beliefs. Further, our results also support the prediction of asymmetric information theory that debt issues convey good news relative to equity issues.

ABSTRACT The aggregate volume of equity issues is used to search for periods when seasoned equity capital can be raised at favorable terms. We find that the price reaction to equity issue announcements in high equity issue volume (HOT) periods is approximately 200 basis points lower on average than in low equity issue volume (COLD) periods. The lower price reaction in hot markets is economically important and is independent of the macroeconomic characteristics of hot and cold markets. The evidence supports the existence of windows of opportunity for equity issues that result at least partially from reduced levels of asymmetric information.

The aggregate volume of equity issues is used to search for periods when seasoned equity capital can be raised at favorable terms. The authors find that the price reaction to equity issue announcements in high equity issue volume periods is approximately 200 basis points lower on average than in low equity issue volume periods. The lower price reaction in hot markets is economically important and is independent of the macroeconomic characteristics of hot and cold markets. The evidence supports the existence of windows of opportunity for equity issues that result at least partially from reduced levels of asymmetric information.

The aggregate volume of equity issues is used to search for periods when seasoned equity capital can be raised at favorable terms. We find that the price reaction to equity issue announcements in high equity issue volume (HOT) periods is approximately 200 basis points lower on average than in low equity issue volume (COLD) periods. The lower price reaction in hot markets is economically important and is independent of the macroeconomic characteristics of hot and cold markets. The evidence supports the existence of windows of opportunity for equity issues that result at least partially from reduced levels of asymmetric information.

The hypothesis that negative abnormal returns following an equity issue are anomalous assumes the use of the correct benchmark. The alternative hypothesis assumes that an incorrect benchmark has been used or that benchmarks change following an issue. We evaluate these assumptions by examining the performance of SEO firms during periods when there was no issue activity. Results indicate that SEO firms experience positive abnormal returns away from the issue window and that positive performance is most pronounced for small SEO firms. These and other results are inconsistent with the alternative hypothesis.