Is There a Window of Opportunity for Seasoned Equity Issuance?

Why does capital structure choice vary with macroeconomic conditions?

“…2 This literature generally focuses on firms that rely on debt financing and face severe agency problems in accessing external capital. 3 It explains how agency problems in accessing external capital at the firm level result in exaggerated swings in economic activity as feedback effects propagate and magnify aggregate shocks. This is consistent with evidence in Kashyap, Stein and Wilcox (1993) (hereinafter KSW), Gertler and Gilchrist (1993), (1994) and Bernanke, Gertler and Gilchrist (1996) (hereinafter BGG) who relate debt issue patterns of firms that have deferential capital market access, using size or bank-dependence as proxies, with aggregate and cohort investment following Federal Reserve monetary contractions or at the onset of recessions.…”

“…For a review of the literature which addresses the relation between financial structure and aggregate activity see Gertler (1988). 3 In the case of Bernanke, Gertler and Gilchrist (1998) and Biais and Casamatta (1999) both debt and outside equity is issued. However, equity risk can be completely diversified since there is no aggregate uncertainty.…”

“…6 and Nanda (1993) argue that adverse selection costs vary counter-cyclically to explain the general increase in equity issues during expansions. Bayless and Chaplinsky (1996) argue that "windows of opportunity" in which capital can be raised at favorable terms result in observed periods of extreme equity issue volume (or "hot" equity markets) as firms time their equity issues. Both Choe, Masulis and Nanda (1993) and Bayless and Chaplinsky (1996) show that, in general, the price reaction to equity issue announcements is less negative during these periods.…”

“…Bayless and Chaplinsky (1996) argue that "windows of opportunity" in which capital can be raised at favorable terms result in observed periods of extreme equity issue volume (or "hot" equity markets) as firms time their equity issues. Both Choe, Masulis and Nanda (1993) and Bayless and Chaplinsky (1996) show that, in general, the price reaction to equity issue announcements is less negative during these periods. Although these papers are helpful in describing some of the regularities in the data, they are not complete.…”

“…6 To explain the negative price reaction to equity issue announcements observed in the data, Jensen (1986) uses a moral hazard argument, as apposed to adverse selection, where managers indulge themselves when they are not forced to make debt interest payments. 7 Bayless and Chaplinsky (1996) document that the average price reaction to an equity issue announcement was for the run-up in the equity market and the variation in the expected price reaction to an equity issue announcement, deviations from target leverage ratios that vary with macroeconomic conditions account for a significant amount of the variation in issue choice. 8 Theoretically, this paper adds to this literature by linking variations in financing choices with macroeconomic conditions using arguments that do not rely on the variation in the price reaction to equity issues in a setting where managers, that face various degrees of financial constraints, can issue either equity or debt securities.…”