The authors conduct a unique test of adverse selection in the equity issuance process. While common stock is the dominant means of payment in bank mergers, stock acquisition agreements provide target shareholders with varying degrees of protection against adverse price movements in the bidder's stock between the time of the merger agreement and the time of merger completion. The authors show that it is the degree of protection against adverse price changes and not the percent of stock offered in a bank merger that explains bidder merger announcement abnormal returns. This result is difficult to explain outside of an adverse selection framework.

Unlike operating company IPOs, Real Estate Investment Trust (REIT) IPOs in the 1970s and 1980s were initially overpriced and subsequently underperformed other REIT securities in the 100 trading days after initial issuance. In contrast. equity REIT IPOs in the 1990s have been underpriced. on average by 3.6%. and have moderately outperformed seasoned equity REITs in the 100 trading days after issuance. We attribute the initial-day underpricing of recent REIT IPOs to greater valuation uncertainty and greater institutional involvement in the recent REIT IPO market. Both of these factors make these issues more susceptible to the ‘winner's curse’.

We conduct a unique test of adverse selection in the equity issuance process. While common stock is the dominant means of payment in bank mergers, stock acquisition agreements provide target shareholders with varying degrees of protection against adverse price movements in the bidder's stock between the time of the merger agreement and the time of merger completion. We show that it is the degree of protection against adverse price changes and not the percent of stock offered in a bank merger that explains bidder merger announcement abnormal returns. This result is difficult to explain outside of an adverse selection framework.

We conduct a unique test of adverse selection in the equity issuance process. While common stock is the dominant means of payment in bank mergers, stock acquisition agreements provide target shareholders with varying degrees of protection against adverse price movements in the bidder's stock between the time of the merger agreement and the time of merger completion. We show that it is the degree of protection against adverse price changes and not the percent of stock offered in a bank merger that explains bidder merger announcement abnormal returns. This result is difficult to explain outside of an adverse selection framework.