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Why Do Firms Issue Equity?
Author(s) -
DITTMAR AMY,
THAKOR ANJAN
Publication year - 2007
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.1540-6261.2007.01200.x
Subject(s) - stylized fact , explanatory power , equity (law) , adverse selection , debt , economics , market timing , financial economics , stock (firearms) , business , finance , macroeconomics , portfolio , mechanical engineering , philosophy , epistemology , political science , law , engineering
We develop and test a new theory of security issuance that is consistent with the puzzling stylized fact that firms issue equity when their stock prices are high. The theory also generates new predictions. Our theory predicts that managers use equity to finance projects when they believe that investors' views about project payoffs are likely to be aligned with theirs, thus maximizing the likelihood of agreement with investors. Otherwise, they use debt. We find strong empirical support for our theory and document its incremental explanatory power over other security‐issuance theories such as market timing and time‐varying adverse selection.