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Equity Issuance and Adverse Selection: A Direct Test Using Conditional Stock Offers
Author(s) -
HOUSTON JOEL F.,
RYNGAERT MICHAEL D.
Publication year - 1997
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/j.1540-6261.1997.tb03813.x
Subject(s) - adverse selection , shareholder , stock (firearms) , equity (law) , business , stock price , common stock , mergers and acquisitions , payment , monetary economics , finance , economics , corporate governance , mechanical engineering , paleontology , context (archaeology) , series (stratigraphy) , political science , law , engineering , biology
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.