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.

We study financial contracting using transactions from the private investments in public equity market. Our tests show that the use of terms that are contingent on an issuer’s future performance increases with issuer risk. Among issuers with poorer stock performance, higher cash burn rates, and more uncertain investment prospects, purchase discount-only contracts are uncommon and contracts with contingent terms are frequently used. Our evidence also supports arguments that issuer bargaining power with investors erodes as financing alternatives grow more limited. In particular, terms that can transfer control to investors are most commonly used by issuers in the weakest financial condition.

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. 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.

ABSTRACT This article examines both the shareholder wealth effects of employee stock ownership plans (ESOPs) announced by firms subject to takeover pressure and the takeover incidence of targets with and without ESOPs. Although we do not find that defensive ESOPs significantly reduce shareholder wealth on average, we identify two factors—the change in managerial and employee ownership due to the ESOP and the simultaneous announcement of other defensive tactics—that are associated with negative stock price reactions. We find that ESOPs are strong deterrents to takeover. ESOP targets that are acquired earn higher returns than targets without ESOPs, but the difference is not statistically significant.

This article examines both the shareholder wealth effects of employee stock ownership plans (ESOPs) announced by firms subject to takeover pressure and the takeover incidence of targets with and without ESOPs. Although we do not find that defensive ESOPs significantly reduce shareholder wealth on average, we identify two factors—the change in managerial and employee ownership due to the ESOP and the simultaneous announcement of other defensive tactics—that are associated with negative stock price reactions. We find that ESOPs are strong deterrents to takeover. ESOP targets that are acquired earn higher returns than targets without ESOPs, but the difference is not statistically significant.

This study provides evidence on how venture capitalists’ (VCs’) allocations of capital to riskier investments, as measured by the proportion of early versus late-stage investment in an industry, are linked to exit market conditions. Prior research has primarily focused on how VCs adjust aggregate investment to public equity market conditions. We develop a more inclusive measure of exit market conditions that accounts for recent secular changes that have affected the industry return structure, specifically, the sharp rise in the number of failures and M&A relative to IPO exits. We show that the dollars gained relative to dollars lost in recent exits and failures are significantly positively related to VCs’ allocations to early-stage companies over the period 1990–2008. The changes in allocations are large enough to have an effect on the availability of funding for early stage companies. In sum, our evidence shows that exit market conditions have a significant and economically meaningful influence on VCs’ allocations to riskier investments.

We examine the in-roads commercial banks have made into equity underwriting over 1990–2002. While banks end the period handling upwards of 25% of equity underwriting, this increase results almost exclusively from acquisitions of investment banks with an already established market share of equity underwriting. We find a significant decline in the market share of equity underwriting that banks acquired in the post-merger period, a decline that is larger than that experienced by independent investment banks of comparable reputation. Banks lose market share because they originate fewer IPOs and their IPOs have a lower incidence of follow-on SEOs compared to independent investment banks. Following the merger, banks experience a large fall off in their ability to retain follow-on SEOs and are less successful in winning SEO mandates when an issuer switches from its IPO underwriter. Overall, the findings suggest it has been difficult for banks to achieve scope economies in equity underwriting.

This paper investigates the motivations for and consequences of including a broad group of employees in leveraged buyouts by comparing employee buyouts (EBOs) to transactions where only top level managers participate, or management buyouts (MBOs). We examine the implications of including employees in a buyout from a labor contracting, financing, and management control point of view. A major finding is that employee participation helps to finance the buyout. The EBO allows firms to gain access to excess pension assets by converting employees' defined benefit pension capital into equity claims, thus freeing the excess assets in the pension plan to help fund the buyout. Also, employee participation substitutes equity claims for cash labor compensation costs and therefore allows the firm to borrow more than otherwise would be possible. There is also evidence consistent with managers including employees to maintain or enhance incumbent management's control.

Corporate debt sales have been regarded as “no news” events because there is no significant price reaction on average to their announcement. We explore the hypothesis that this lack of average price reaction to debt sale announcements is explained by the partial anticipation of debt offers. Theory suggests that the demand for debt capital is fundamentally related to changes in the sources and uses of funds, and we find evidence that earnings are significantly lower, investment growth is significantly higher, and, for some issuers, debt refunding requirements are significantly greater in the period immediately prior to issue than in periods well before and after the issue. We find that this preissue information conditions investors’ expectations of issue, thereby affecting the cross-sectional announcement date price reaction to debt sales in two ways. First, announcement date price reactions are negative, on average, for unanticipated offers or for those offers where prior information suggests that an issue is unlikely. Second, holding the probability of issue constant, announcement date price reactions are significantly more negative for offers that raise more capital than investors expected. These results are consistent with cash flow signaling and asymmetric information models of corporate financings.