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 extensive evidence about how psychological biases affect investor behavior and prices. Systematic mispricing probably causes substantial resource misallocation. We argue that limited attention and overconfidence cause investor credulity about the strategic incentives of informed market participants. However, individuals as political participants remain subject to the biases and self-interest they exhibit in private settings. Indeed, correcting contemporaneous market pricing errors is probably not government’s relative advantage. Government and private planners should establish rules ex ante to improve choices and efficiency, including disclosure, reporting, advertising, and default-option-setting regulations. Especially

We examine the stock price reaction to earnings announcements in the five years following seasoned equity offerings (SEOs). On average, post-SEO earnings announcements are met with a significantly negative abnormal stock price reaction. Although this negative reaction accounts for a disproportionately large portion of long-run post-SEO abnormal stock returns, on average, abnormal stock price reactions to post-SEO earnings announcements are reliably negative only within the smallest quartile of equity issuers. For small firms, therefore, these findings are broadly consistent with the hypothesis that firms issue equity when the market over-estimates the firm’s future earnings performance.

We extend the literature on secondary issues of common stock by examining long-run stock and operating performance. In contrast to the performance of primary equity issuers, the long-run stock performance of firms following secondary distributions is positive, but not significant. For a subsample of secondary issuers in which the seller is an insider, however, both three- and five-year post-issue abnormal stock returns are significantly negative. The operating performance of these firms also declines subsequent to the issue. This supports the hypothesis that the negative performance of secondary equity offerings can partly be attributed to managers exploiting “windows of opportunity ” by issuing overvalued shares.

do not necessarily represent those of the Federal Reserve Bank of New York or the Federal Reserve System. Costs and benefits of mandatory subordinated debt regulation for banks Proposals for regulation requiring that banks maintain some minimum level of subordinated debt have gained support recently. These proposals focus on the benefits of such regulation, specifically, that supervisors are expected to free ride on debtholders ’ monitoring efforts. But there are also monitoring and other costs: there is no real free ride. This paper uses the theory of capital structure to look at both costs and benefits of mandating subordinated debt for banks. The theory encompasses the touted monitoring benefits, but also identifies potential pitfalls such as excessive monitoring and opportunity costs, increased risk of bankruptcy, and distortion of market signals. The analysis suggests that, to tap into the benefits of subordinated debt, it is more sensible to eliminate disincentives from holding it than to force banks away from optimal levels. JEL Codes: G21, G28, G32Costs and benefits of mandatory subordinated debt regulation for banks Proposals for regulation requiring banks to hold certain minimum levels of subordinated debt have been around for years, and recently seem to have been gaining broader support. For

A series of deregulatory reforms have promoted accelerated equity issuance at the expense of adequate time for underwriter due diligence. These reforms have gained wide acceptance, raising doubts about the value of due diligence investigations for today’s large seasoned issuers. However, recent high-profile corporate scandals indicate that due diligence matters. We hypothesize that low quality issuers prefer accelerated offers and that high quality issuers, in contrast, signal their quality by allowing more time for underwriters to perform due diligence. We provide support for this hypothesis using a battery of tests that examine stock valuation and earnings quality around equity offers.

A closed-form equilibrium solution to the issuance game jointly reflects the lemons problem and a quality screening effect. Low quality firms have a disincentive to issue new equity if their endowed investment opportunity has a negative NPV. Consequently, these low quality firms would find it economically less desirable to issue in "cold markets " where expected return on investment and/or assets in place are lower and/or issuance costs are higher, thus decreasing the lemons problem highlighted in Myers and Majluf (1984). Consistent with our model, seasoned equity offerings ' (SEOs') two-day announcement period abnormal returns in under performing industries are about fifty basis points higher then in outperforming industries, and larger proportions of under performing industry SEOs have a positive announcement

for funding this project. ADS is an IT strategy consulting and systems integration firm dedicated to serving the needs of the financial services industry. The authors are also

Evidence from Property and Liability Insurance Firms We explore the impact of industrial demand of capital on IPO underpricing in the property and liability insurance industry. We find that although insurance firms display significant IPO underpricing, the magnitude is smaller compared to industrial firms. Moreover, our finding suggests that more firms go public during capital constrained periods and the scope of underpricing actually goes down. Our evidence is supportive to our hypothesis that information asymmetry across property and liability insurance industry is lower during capital constraint

underwriting; investment banking This chapter analyzes the securities issuance process, focusing on initial public offerings (IPOs) and seasoned equity offerings (SEOs). The IPO literature documents three empirical patterns: 1) short-run underpricing, 2) long-run underperformance (although this is contentious), and 3) extreme time-series fluctuations in volume and underpricing. While the chapter mainly focuses on evidence from the U.S., evidence from other countries is generally consistent with the U.S. patterns. A large literature explaining the short-run underpricing of IPOs exists, with asymmetric information models predominating. The SEO literature documents 1) negative announcement effects, 2) the setting of offer prices at a discount from the market price, 3) longrun underperformance, and 4) large fluctuations in volume. In addition to long-run underperformance relative to other stocks, there is some evidence that issuers succeed at timing their equity offerings for periods when future market returns are low. When examining a large class of corporate financing activities, including equity offerings, convertible bond offerings, bond offerings, open market repurchases, stock- and cash-financed mergers and acquisitions, and