The Effect of Asymmetric Information on the Pricing of Equity Issuance
DOI:
https://doi.org/10.47941/ijf.901Keywords:
Asymmetric Information, Equity Issuance, Brokerage Mergers, Quasi-Natural ExperimentAbstract
Purpose: This paper examined the adverse selection in the market for seasoned equity issuance.
Methodology: The asymmetric information explained the price reduction at the date of equity issuance. In particular, equity issuance tended to follow credible information releases since companies issued equity when the market was the most informed about the quality of their firms. The paper exploited brokerage mergers as a quasi-natural experiment that increased information asymmetry through their effect on the extent of research coverage by sell-side equity analysts.
Findings: The broker mergers unexpectedly terminated brokers operation, and the level of analyst coverage decreased for the firms previously covered by these analysts. This paper showed that the cumulative abnormal return was positive around the date of equity issuance when asymmetric information increased and more substantial for stocks that lost analyst coverage relative to the stocks that never lost any coverage. Moreover, affected companies by the brokerage mergers issued more equity after the events compared to the control group. This paper showed the causal impact of losing analyst coverage on price at the time of equity issuance.
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Copyright (c) 2022 Mehrnoush Shahhosseini
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