The Myers and Majluf (1984) model predicts a nonpositive price reaction to an announcement of a new issue of equity. This paper shows that the Myers and Majluf result is a direct outcome of their assumption that all potential projects facing the firm have a nonnegative net present value. Refining the Myers and Majluf model, by allowing for the realistic possibility of potential projects having negative net present values, leads to different predictions. The refined model predicts positive as well as negative stock price responses, consistent with recent empirical evidence concerning the stock price effects of new stock issues.

In sharp contrast to results in the United States, the average stock price response to an announcement of a seasoned equity issue in Japan is positive. Offer prices in Japan, unlike the United States, are announced several days before the beginning of the subscription period and incorporate a substantial discount. We suggest that the positive announcement effects in Japan are consistent with the underwriter's certification of the issuing firm's value. We characterize the underwriter's risk as a put option and find a positive association between the underwriter's risk and the announcement returns, as well as other results consistent with underwriter certification.

Using a large sample of limit orders on NYSE stocks, we find that investors submit more limit orders with even-eighth prices than odd-eight prices. However, even though there are a greater number of even-eighth limit orders, the proportion of executing limit orders submitted with even prices is greater than those submitted with odd prices for a large portion of our sample. We find that clustering on even prices is a positive function of stock price and various proxies for the dispersion in investors’ reservation prices. The preference for even prices affects stock quotes: Investors are more likely to submit a quote improving limit order if the limit price is even and quoted depth is higher for even quotes than for odd quotes.

Each trader must choose between a limit order, a market order, or using a floor broker. We hypothesize that informed investors will: (1) concentrate their trading in floor broker orders and (2) sometimes trade patiently. Consistent with our hypotheses, empirical results suggest that most informed trading occurs through orders executed by floor brokers and that informed floor brokers are sometimes patient. Regardless of their patience, however, quote revisions following trade executions are consistent with the hypothesis that markets recognize that floor traders are more likely to be informed than other traders. As a result, informed trading moves equilibrium security values.

The authors study the price elasticity of demand for the common stock of an individual corporation. Despite the prevalance of assumptions that demand is perfectly elastic, there is little, if any, direct evidence in the literature to either support or reject that contention. Consistent with the notion of finite price elasticities, the authors find that the announcement of primary stock offerings by regulated firms depresses their stock prices and little, if any, evidence that this decline is the result of adverse information about future cash flows. Attempts to relate offer announcement effects directly to possible determinants of price elasticities, however, are inconclusive.

We study the price elasticity of demand for the common stock of an individual corporation. Despite the prevelance of assumptions that demand is perfectly elastic, there is little if any direct evidence in the literature to either support or reject that contention. Consistent with the notion of finite price elasticities, we find that the announcement of primary stock offerings by regulated firms depresses their stock prices and little if any evidence that this decline is the result of adverse information about future cash flows. Attempts to relate offer announcement effects directly to possible determinants of price elasticities, however, are inconclusive.

We examine acquisitions of private firms with valuation histories and find a positive relation between acquirer announcement returns and target valuation revisions. Similar to other studies, acquirer announcement returns are positive, on average. However, positive acquirer announcement returns are mainly driven by targets that are acquired for more than their prior valuation. This relation is consistent with pricing effects associated with target valuation uncertainty and behavioral biases in negotiation outcomes.

In sharp contrast to results in the United States, the average stock price response to an announcement of a seasoned equity issue in Japan is positive. Offer prices in Japan, unlike the United States, are announced several days before the beginning of the subscription period and incorporate a substantial discount. We suggest that the positive announcement effects in Japan are consistent with the underwriter's certification of the issuing firm's value. We characterize the underwriter's risk as a put option and find a positive association between the underwriter's risk and the announcement returns, as well as other results consistent with underwriter certification.

We investigate the pricing of 4,989 equity IPOs with offer dates between 1981 and 2000. Approximately three-fourths of these IPOs have integer offer prices. Average initial returns for IPOs with integer offer prices are significantly higher (24.5%) than those priced on the fraction of the dollar (8.1%). This result is robust through time and after conditioning for other effects known to influence initial returns. We hypothesize that integer vs. fractional dollar IPOs are the result of negotiations between the issuing firm and underwriter. Under this negotiation hypothesis, the frequency of integer pricing should be an increasing function of the offer price and the degree of uncertainty surrounding the value of the firm. Empirical evidence, supportive of the negotiation hypothesis, is presented.