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Equity Issues with Time-Varying Asymmetric Information

Published online by Cambridge University Press:  06 April 2009

Robert A. Korajczyk ,
Deborah J. Lucas  and
Robert L. McDonald
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Abstract

This paper develops a formal model of the effect of time-varying asymmetric information on the timing and pricing of equity issues when managers are better informed than outside investors. We assume that as time passes, the adverse selection problem becomes more severe as more managers receive a private signal. Under this assumption, the model predicts temporal variation in the quantity of issues, with a bunching of issues after information releases. It also predicts that the price drop at issue announcement increases with the time since the last information release. These predictions are consistent with several recent empirical studies relating equity issues to earnings and dividend announcements.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 27 , Issue 3 , September 1992 , pp. 397 - 417
Copyright
Copyright © School of Business Administration, University of Washington 1992

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