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Equity Issues and Stock Price Dynamics

Deborah J. Lucas and Robert L. McDonald
The Journal of Finance
Vol. 45, No. 4 (Sep., 1990), pp. 1019-1043
Published by: Wiley for the American Finance Association
DOI: 10.2307/2328713
Stable URL: http://www.jstor.org/stable/2328713
Page Count: 25
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Equity Issues and Stock Price Dynamics
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Abstract

This paper presents an information-theoretic, infinite horizon model of the equity issue decision. The model predicts that (a) equity issues on average are preceded by an abnormal positive return on the stock, although for some firms the issue is preceded by a loss; (b) equity issues on average are preceded by an abnormal rise in the market; and (c) the stock price drops at the announcement of an issue. The model provides a measure of the welfare cost of asymmetric information; the welfare loss may be small even if the price drop at issue announcement is large.

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