What Drives Security Issuance Decisions: Market Timing, Pecking Order, or Both?

Dong, Ming; Lončarski, Igor; Horst, Jenke ter; Veld, Chris

doi:10.1111/j.1755-053x.2012.01213.x

Cited by 55 publications

(21 citation statements)

References 84 publications

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“…We use the book-to-market ratio of equity (B/M) as a proxy for the misvaluation of the issuing firm's stock, in line with Baker andWurgler (2002, 2004), Jenter (2005), Dong et al (2006), and Dong et al (2012). A higher B/M value indicates a lower stock valuation level and therefore a higher cost of equity.…”

Section: Methodsmentioning

confidence: 99%

“…These variables are related to asymmetric information, agency costs, financial distress costs, and growth stage (Bayless and Chaplinsky, 1991;Jung et al, 1996;Lewis et al, 8 Our key proxy for the cost of equity, book-to-market, might also act as an inverse proxy for growth opportunities (Dong et al, 2012). Despite this limitation we believe that B/M is a suitable proxy for our research, as it should at least be significantly correlated with equity misvaluation.…”

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confidence: 93%

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Why Do Firms Issue Convertible Bonds? Evidence from the Field

2012

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We use in-depth interviews with top corporate executives to examine why companies issue convertible bonds. We find that firms issue convertibles when they perceive these securities to be a cheaper form of financing than straight bonds and equity. A large-sample analysis of security offerings confirms this insight by highlighting feature-adjusted yield spreads as a significant determinant of the choice between convertibles and straight bonds, and equity misvaluation as a significant determinant of the choice between convertibles and equity. Our interviews also allow us to verify individual convertible bond theories. We obtain evidence for the theory that convertible bonds are more suitable than straight debt when management and investors disagree about the riskiness of the firm. However, risk shifting, sequential financing, and backdoor equity theories receive little or no support. Finally, our interviews provide strong evidence for the impact of investor demand and financial intermediaries on convertible bond issuance decisions, two factors under-explored by previous studies. JEL: G32, G13, G24

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Section: Methodsmentioning

confidence: 99%

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confidence: 93%

Why Do Firms Issue Convertible Bonds? Evidence from the Field

2012

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“…Our second hypothesis is that a firm's decision to issue Sukuk depends on the firm's stock price, as many studies have asserted in the case of conventional debt issuance and equity. Baker and Wurgler (2002) and Dong et al (2012) each notes that a firm issues conventional debt securities (equity) when the stock price is undervalued (overvalued). The current study assumes that Sukuk is a debt, and thus, firms accordingly have an alternative debt instrument they can use in addition to conventional debt issuance.…”

Section: Hypothesesmentioning

confidence: 99%

Who issues Sukuk and when?: An analysis of the determinants of Islamic bond issuance

Nagano

2016

Rev Financ Econ

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Using security issuer data from Malaysia, Indonesia, Saudi Arabia, and the United Arab Emirates from the 2001-2013 period, this study investigates how Islamic bond (Sukuk) issuers differ from conventional debt and equity issuers. An international comparative analysis of these three types of security issuers yields three key insights. First, accessibility to the Sukuk market is essential in choosing Sukuk issuance; other determinants will not promote the use of Sukuk, unless this requirement is first satisfied. Second, the low degree of financial constraints on a firm promotes Sukuk issuance, once the required condition of issuer accessibility to the Sukuk market is satisfied. Third, undervaluation of a firm in the pre-issuance period also encourages Sukuk issuance, once the issuer's Sukuk market accessibility condition is satisfied.Taken together, we conclude that Sukuk issuance is preferred along with market timing, once the pecking-order conditions of market accessibility are satisfied.JEL Classifications: G20, G21, G32 AbstractUsing security issuer data from Malaysia, Indonesia, Saudi Arabia, and the United Arab Emirates from the 2001-2013 period, this study investigates how Islamic bond (Sukuk) issuers differ from conventional debt and equity issuers. An international comparative analysis of these three types of security issuers yields three key insights. First, accessibility to the Sukuk market is essential in choosing Sukuk issuance; other determinants will not promote the use of Sukuk, unless this requirement is first satisfied. Second, the low degree of financial constraints on a firm promotes Sukuk issuance, once the required condition of issuer accessibility to the Sukuk market is satisfied. Third, undervaluation of a firm in the pre-issuance period also encourages Sukuk issuance, once the issuer's Sukuk market accessibility condition is satisfied.Taken together, we conclude that Sukuk issuance is preferred along with market timing, once the pecking-order conditions of market accessibility are satisfied.JEL Classifications: G20, G21, G32

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“…Previous studies find that the market-to-book ratio is positively associated with the probability that a firm conducts a seasoned equity offering (Baker and Wurgler (2002), DeAngelo, DeAngelo, andStulz (2010), andDong et al (2012)). However, market-to-book reflects growth opportunities (among other things) as well as misvaluation, so this does not establish whether market inefficiency affects equity issuance.…”

Section: Existing Empirical Approaches To Misvaluation and Financing mentioning

confidence: 99%

“…Hypothesis 1: Equity issuance and total issuance increase with the degree of overval-4 DeAngelo, DeAngelo, and Stulz (2010) and Dong et al (2012) also use ex post market-adjusted returns as an alternative proxy for misvaluation; such tests were discussed earlier. D'Mello and Shroff (2000) find that firms that are undervalued based upon a version of the V /P measure tend to engage in repurchase tender offers.…”

Section: Hypothesesmentioning

confidence: 99%

Overvalued Equity and Financing Decisions

2012

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We test whether and how equity overvaluation affects corporate financing decisions using an ex ante misvaluation measure that filters firm scale and growth prospects from market price. We find that equity issuance and total financing increase with equity overvaluation; but only among overvalued stocks; and that equity issuance is more sensitive than debt issuance to misvaluation. Consistent with managers catering to maintain overvaluation and with investment scale economy effects, the sensitivity of equity issuance and total financing to misvaluation is stronger among firms with potential growth opportunities (low book-to-market, high R&D, or small size) and high share turnover. Overvalued Equity and Financing DecisionsWe test whether and how equity overvaluation affects corporate financing decisions using an ex ante misvaluation measure that filters firm scale and growth prospects from market price. We find that equity issuance and total financing increase with equity overvaluation; but only among overvalued stocks; and that equity issuance is more sensitive than debt issuance to misvaluation. Consistent with managers catering to maintain overvaluation and with investment scale economy effects, the sensitivity of equity issuance and total financing to misvaluation is stronger among firms with potential growth opportunities (low book-to-market, high R&D, or small size) and high share turnover.

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What Drives Security Issuance Decisions: Market Timing, Pecking Order, or Both?

Cited by 55 publications

References 84 publications

Why Do Firms Issue Convertible Bonds? Evidence from the Field

Why Do Firms Issue Convertible Bonds? Evidence from the Field

Who issues Sukuk and when?: An analysis of the determinants of Islamic bond issuance

Overvalued Equity and Financing Decisions

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