It is well known that firms are more likely to issue equity when their market values are high, relative to book and past market values, and to repurchase equity when their market values are low. We document that the resulting effects on capital structure are very persistent. As a consequence, current capital structure is strongly related to historical market values. The results suggest the theory that capital structure is the cumulative outcome of past attempts to time the equity market.

The share of equity issues in total new equity and debt issues is a strong predictor of U.S. stock market returns between 1928 and 1997. In particular, firms issue relatively more equity than debt just before periods of low market returns. The equity share in new issues has stable predictive power in both halves of the sample period and after controlling for other known predictors. We do not find support for efficient market explanations of the results. Instead, the fact that the equity share sometimes predicts significantly negative market returns suggests inefficiency and that firms time the market component of their returns when issuing securities.

We review the theory and evidence on IPO activity: why firms go public, why they reward first-day investors with considerable underpricing, and how IPOs perform in the long run. Our perspective is threefold: First, we believe that many IPO phenomena are not stationary. Second, we believe research into share allocation issues is the most promising area of research in IPOs at the moment. Third, we argue that asymmetric information is not the primary driver of many IPO phenomena.

We survey 401 financial executives, and conduct in-depth interviews with an additional 20, to determine the key factors that drive decisions related to reported earnings and voluntary disclosure. The majority of firms view earnings, especially EPS, as the key metric for outsiders, even more so than cash flows. Because of the severe market reaction to missing an earnings target, we find that firms are willing to sacrifice economic value in order to meet a short-run earnings target. The preference for smooth earnings is so strong that 78 % of the surveyed executives would give up economic value in exchange for smooth earnings. We find that 55 % of managers would avoid initiating a very positive NPV project if it meant falling short of the current quarter’s consensus earnings. Missing an earnings target or reporting volatile earnings is thought to reduce the predictability of earnings, which in turn reduces stock price because investors and analysts hate uncertainty. We also find that managers make voluntary disclosures to reduce information risk associated with their stock but try to avoid setting a disclosure precedent that will be difficult to maintain. In general, management’s views provide support for stock price motivations for earnings management and voluntary disclosure, but provide only modest evidence in support of other

This paper explores the role of investment bankers and lock-up provisions in the market for new equity issues. In a sample of 1,948 IPOs, we find support for the notion that lock-ups serve as commitment mechanisms at the time of the IPO. Insiders of firms that are associated with greater informational asymmetries lockup their shares for a longer period of time. We also find that underpricing is higher for firms that lock-up their shares for a longer period of time or lock-up a larger fraction of their shares. The average abnormal return at lock-up expiration is-1.2 % on average and is larger for firms that lock-up a greater fraction of their shares and firms that are backed by venture capitalists. This price drop is inconsistent with rational expectations on the part of investors. Finally, we find that earnings forecasts made by both affiliated and unaffiliated analysts are more optimistic around lock-up expiration and their recommendations are temporarily more favorable. Moreover, affiliated analysts are more likely to issue “strong buy ” recommendations than are unaffiliated analysts at these lock-up expirations.

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Research in behavioral corporate finance takes two distinct approaches. The first emphasizes that investors are less than fully rational. It views managerial financing and investment decisions as rational responses to securities market mispricing. The second approach emphasizes that managers are less than fully rational. It studies the effect of nonstandard preferences and judgmental biases on managerial decisions. This survey reviews the theory, empirical challenges, and current evidence pertaining to each approach. Overall, the behavioral approaches help to explain a number of important financing and investment patterns. The survey closes with a list of open questions.

A simple model is developed in the paper in which two market conditions change over time: (i) investor sentiment or price-insensitive demand; and (ii) feedback trader risk or the propensity of investors to chase trends. The model shows that these conditions partially explain the three anomalies associated with the IPO market: (i) underpricing; (ii) windows of opportunity for new issues and (iii) long-term underperformance. The model is tested using a sample of firm commitment IPOs over the 1975-1987 period. The paper finds that the predictions of the model are largely borne out in the data. 1 We thank Jay Ritter and Mike Vetsuypens, and I.B.E.S. for allowing us to use their database.

The literature on IPOs offers a wide variety of explanations to justify the dramatic swings in the volume of IPOs observed in the market. Many theories predict that hot IPO markets are characterized by clusters of firms in particular industries for which a technological innovation has occurred, suggesting that hot and cold market IPO firms will differ in quality, prospects, or types of business. We compare firms that go public in the two types of markets from 1982-93, examining them at the time of the IPO and in the following five years. We find that both hot and cold market IPOs are largely concentrated in the same narrow set of high-tech industries. We also find few distinctions in quality or long-term earnings potential. Our results are not consistent with the going public models that imply cold market IPOs are firms with few product innovations and lower growth prospects. Jean Helwege Department of Finance Ohio State University 812 Fisher Hall 2100 Neil Avenue Columbus, OH 43210 (614) 292-3217 (614) 292-2418 FAX helwege_1@cob.osu.edu Nellie Liang Board of Governors of the Federal Reserve System Division of Research and Statistics Capital Markets Section Mail Stop 89 Washington, DC 20551 (202) 452-2918 (202) 452-3819 FAX nliang@frb.gov For example, Ritter (1984) shows that most of the underpricing in the hot issue market of 1980-1981 is attributable to underpricing among IPOs in the natural resources sector. Also, see Lowry and Schwert (2000) on the relationship between underpricing and volume in hot and cold markets, as well as James and Krieshnick (1997).

We study the relations among abnormal accounting accruals measures of earnings management, stock offers, post-offer stock returns, and related shareholder lawsuits. We find that accruals are abnormally high around stock offers, especially high for firms that are subsequently sued about their offers. These accruals tend to reverse after stock offers and are negatively related to post-offer stock returns. Reversals are more pronounced and stock returns are much lower for sued firms than for those that are not sued. In multivariate logistic regressions the incidence of lawsuits involving stock offers is significantly positively related to abnormal accruals around the offer and significantly negatively related to post-offer stock returns. Moreover, settlement amounts in the lawsuits are also significantly positively related to the abnormal accruals and significantly negatively related to post-offer stock returns. These results support the view that some firms opportunistically manipulate earnings upward before stock issues rendering themselves vulnerable to litigation.