DP4833 The Choice of Seasoned-Equity Selling Mechanism: Theory and Evidence

Author(s): B Espen Eckbo, Øyvind Norli
Publication Date: January 2005
Keyword(s): adverse selection, equity offering, flotation method, rights offer, sequential equilibrium, underwriting
JEL(s): G20, G24, G30, G32
Programme Areas: Financial Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=4833

Extending the Myers and Majluf (1984) framework, we present a model for the choice of seasoned-equity selling mechanism. A sequential pooling equilibrium exists which implies a positive market reaction to certain flotation strategies. We examine the model implications using the market reaction to issues on the Oslo Stock Exchange using the full range of flotation methods. The average market reaction is non-negative across all methods, and significantly positive for both rights offerings and private placements, as predicted. We also show that average long-run abnormal stock returns to OSE issuers are indistinguishable from zero, supporting the market rationality assumption underpinning the flotation game.