Equity Issues and Stock Price Dynamics

42 Pages Posted: 22 Aug 2007 Last revised: 30 Aug 2021

Date Written: November 1989

Abstract

This paper presents an information-theoretic, infinite horizon model of the equity issue decision. The model's predictions about stock price behavior and issue timing explain most of the stylized facts in the empirical literature: (a) equity issues on average are preceded by an abnormal positive return on the stock, although there is considerable variation across firms, (b) equity issues on average are preceded by an abnormal rise in the market, and (c) the stock price drops significantly at the announcement of an issue. In this model, the price drop at issue announcement is uncorrelated with the social cost of suboptimal investment due to asymmetric information; the welfare loss may be small even if the price drop is large.

Suggested Citation

Lucas, Deborah J. and McDonald, Robert L., Equity Issues and Stock Price Dynamics (November 1989). NBER Working Paper No. w3169, Available at SSRN: https://ssrn.com/abstract=467623

Deborah J. Lucas (Contact Author)

Northwestern University - Kellogg School of Management ( email )

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National Bureau of Economic Research (NBER)

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Robert L. McDonald

Northwestern University - Kellogg School of Management ( email )

2001 Sheridan Road
Evanston, IL 60208
United States
847-491-8344 (Phone)
847-491-5719 (Fax)

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