Does market microstructure matter for corporate finance? Theory and evidence on seasoned equity offering decisions

Ming Yan William Cheung; Scott Fung; Lewis Tam

doi:10.1016/j.qref.2015.06.003

Does market microstructure matter for corporate finance? Theory and evidence on seasoned equity offering decisions

Ming Yan William Cheung, Scott Fung, Lewis Tam

Research output: Contribution to journal › Article › peer-review

2 Citations (Scopus)

Abstract

This study presents a theoretical model and empirical analysis to examine how market microstructure affects Seasoned Equity Offering (SEO) decisions from the perspective of information production associated with market liquidity. We present two sets of new findings. First, the market illiquidity of a firm's stock (measured by price impact and bid-ask spread) has a significantly negative impact on the probability of SEO, as well as on the size of the offering. A decrease of the pre-issue price impact by one standard deviation is associated with an increase of normalized SEO proceeds of 9.7%. The impact of market illiquidity is larger when pre-SEO price is less informative. Second, SEO decision predicts a more informative stock price. Our results are robust to alternative measures of market liquidity, price informativeness and SEO.

Original language	English
Pages (from-to)	149-161
Number of pages	13
Journal	Quarterly Review of Economics and Finance
Volume	60
DOIs	https://doi.org/10.1016/j.qref.2015.06.003
Publication status	Published - 2016 May 1
Externally published	Yes

Keywords

Corporate financing decision
Market liquidity
Market microstructure

ASJC Scopus subject areas

Finance
Economics and Econometrics

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10.1016/j.qref.2015.06.003

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abstract = "This study presents a theoretical model and empirical analysis to examine how market microstructure affects Seasoned Equity Offering (SEO) decisions from the perspective of information production associated with market liquidity. We present two sets of new findings. First, the market illiquidity of a firm's stock (measured by price impact and bid-ask spread) has a significantly negative impact on the probability of SEO, as well as on the size of the offering. A decrease of the pre-issue price impact by one standard deviation is associated with an increase of normalized SEO proceeds of 9.7%. The impact of market illiquidity is larger when pre-SEO price is less informative. Second, SEO decision predicts a more informative stock price. Our results are robust to alternative measures of market liquidity, price informativeness and SEO.",

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AU - Tam, Lewis

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