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Cross-market timing in security issuance

Gao, Pengjie and Lou, Dong (2011) Cross-market timing in security issuance. AFA 2012 Chicago Meetings Paper , SSRN.

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Abstract

This paper analyzes the interaction between firms' debt and equity market timing decisions in response to equity misvaluation, as well as how these timing decisions vary across firms with different external funding needs. We use price pressure resulting from mutual fund flow-induced trading to identify equity misvaluation. We find that when equity is overvalued, the least financially constrained firms issue equity and use the proceeds to retire debt, acting as pure arbitrageurs. In contrast, firms that are most financially constrained issue both overpriced equity and debt to increase investment. Our finding that equity market timing does not vary significantly with external funding needs, while debt market timing does, implies that the financing channel of equity mispricing impacting firm investment works primarily through debt issues.

Item Type: Monograph (Working Paper)
Official URL: http://papers.ssrn.com/sol3/JELJOUR_Results.cfm?fo...
Additional Information: © 2011 The authors
Library of Congress subject classification: H Social Sciences > HB Economic Theory
H Social Sciences > HG Finance
Journal of Economic Literature Classification System: G - Financial Economics > G1 - General Financial Markets > G12 - Asset Pricing; Trading volume; Bond Interest Rates
G - Financial Economics > G1 - General Financial Markets > G14 - Information and Market Efficiency; Event Studies
Sets: Departments > Finance
Collections > Economists Online
Rights: http://www.lse.ac.uk/library/usingTheLibrary/academicSupport/OA/depositYourResearch.aspx
Date Deposited: 16 Apr 2012 13:34
URL: http://eprints.lse.ac.uk/43123/

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