TY - JOUR
T1 - Does market microstructure matter for corporate finance? Theory and evidence on seasoned equity offering decisions
AU - Cheung, William
AU - Fung, Scott
AU - Tam, Lewis
N1 - Funding Information:
We thank the editors, and two anonymous referees for their valuable suggestions and comments. We thank Southwestern Finance Association for giving us the Best Paper Award in Investments at the 2009 SWFA Annual Meeting and Financial Management Association for listing our paper in one of the “Top” sessions. We thank Sir James Mirrlees, whose suggestions substantially improve our paper. We thank Richard Chung, Wilson Tong, Sinan Goktan, Paul Moon Sub Choi, Volkan Kayacetin, and the participants at the 2009 SWFA Annual Meeting, the 2009 FMA Annual Meeting, and the research seminars at California State University, East Bay and University of Macau for providing helpful comments and suggestions. We thank Li Bao, Eugene Chong, Bing Feng, Leland Huss, and Jane Zhang for excellent research assistance. Cheung would like to acknowledge research and conference support at the Research & Development Administration Office, University of Macau. Fung would like to acknowledge the support of the Jack and Susan Acosta Professorship at California State University, East Bay. Tam would like to acknowledge research and conference support at University of Macau.
Publisher Copyright:
© 2015 The Board of Trustees of the University of Illinois.
PY - 2016/5/1
Y1 - 2016/5/1
N2 - 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.
AB - 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.
KW - Corporate financing decision
KW - Market liquidity
KW - Market microstructure
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U2 - 10.1016/j.qref.2015.06.003
DO - 10.1016/j.qref.2015.06.003
M3 - Article
AN - SCOPUS:84939205371
VL - 60
SP - 149
EP - 161
JO - Quarterly Review of Economics and Finance
JF - Quarterly Review of Economics and Finance
SN - 1062-9769
ER -