When calling its convertible bonds, a company must typically give bondholders a notice period of about 30 days to decide whether to convert the bonds. This notice period affects the optimal call policy for convertible bonds. After accounting for the notice period, convertible bonds in our sample would have been optimally called when the stock was at about an 11% premium (median) relative to the conversion price. We show that after properly accounting for the call notice period and other factors, the median excess call premium is less than 4%—substantially less than the 26–44% call premium previous researchers have documented.

We show that stock market liquidity is an important determinant of the cost of raising external capital. Using a large sample of seasoned equity offerings, we find that, ceteris paribus, investment banks' fees are significantly lower for firms with more liquid stock. We estimate that the difference in the investment banking fee for firms in the most liquid vs. the least liquid quintile is about 101 basis points or 21% of the average investment banking fee in our sample. Our findings suggest that firms can reduce the cost of raising capital by improving the market liquidity of their stock.

ABSTRACT Previous studies have found that the proportion of equity in total new debt and equity issues is negatively correlated with future equity market returns. Researchers have interpreted this finding as evidence that corporate managers are able to predict the systematic component of their stock returns and to issue equity when the market is overvalued. In this article we show that the predictive power of the share of equity in total new issues stems from pseudo‐market timing and not from any abnormal ability of managers to time the equity markets.