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Existing empirical evidence suggests that the announcement‐day reaction to equity issuance is about 2.88 percent more negative than the reaction to debt. However, announcement‐day returns do not accurately reflect investor reaction if issue announcements are anticipated. I re‐examine the announcement‐day reaction to equity and debt issues after controlling for the predictability of security type and for firms' previous issue experience. Results indicate that the reaction to a first‐time seasoned equity issue is more than 4.15 percent more negative than the reaction to debt. This increase over the conventional estimate suggests that the reaction to equity may be more negative, relative to debt, than previously believed. The evidence supports the assertion that giving preference to debt over equity could reduce issue costs when asymmetric information is a problem. Timing and certification strategies for lowering issue costs appear to be relatively unimportant for debt issues.

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This paper analyzes a large sample of public security offerings to determine the motivation to issue debt or common equity. The results provide new evidence that the existence of asymmetric information plays a key role in firms' choice of security. Bankruptcy risk appears to affect the issue decision, but other traditional capital structure considerations do not. Variations in the determinants of security choice over time suggest a dynamic aspect to capital structure decisions not recognized in previous studies.