Durations between Equity and Debt Issues and Their Effect on the Offering Announcement Returns

Abstract

This study examines (1) durations between equity and debt offerings over the corporate lifecycle, (2) the factors that explain variations in the time to equity or debt issue, and (3) the relation between the market reaction to equity and debt issue announcements and the duration between offerings. We report that after the Initial Public Offering (IPO), the first seasoned equity issue is quicker than the first seasoned debt issue. However, for subsequent seasoned offerings, debt issues are quicker than equity. Using duration analysis, we show that shorter durations between equity and debt issues are explained by stock mispricing, VC-backing of the stock at the IPO, measures of information asymmetry, stock liquidity, deviations from target leverage, return volatility, financing gap, firm investments and the choice of public vs. private placement. Also, the time to an equity issue is shorter if the previous issue was of debt. Investors react more unfavorably to equity and debt issues that follow closely from the previous offering. This is because firms with higher information asymmetry and stock mispricing are more likely to quickly issue equity and debt following the previous capital acquisition. Together, our study shows that duration between equity and debt issues signals issuer quality and that investors discount this information in the stock price at the equity and debt issue announcements. JEL classification: G30, G32, C41