Academic journal article Journal of Financial Management & Analysis

EMPIRICAL STUDY OF MARKET CONDITIONS AND IPOs PUBLIC OFFERINGS : U.S. ECONOMY IN PERSPECTIVE

Academic journal article Journal of Financial Management & Analysis

EMPIRICAL STUDY OF MARKET CONDITIONS AND IPOs PUBLIC OFFERINGS : U.S. ECONOMY IN PERSPECTIVE

Article excerpt

(ProQuest: ... denotes formulae omitted.)

Introduction

The previous studies that examine the relation between the level of interest rates and equity market activity have conflicting results. Jalilvand and Harris1 show that equity markets become more active when interest rates are relatively low. On the other hand, Choe, Masulis, and Nanda2 show that interest rate variables are generally insignificant when explaining the timing of stock offerings.

Of course, the market timing literature is extensive and dates back to 1970s. Taggart3, Marsh4, Jalilvand and Harris, Asquith and Mullins5, Rajan and Zingales6, Jung, Kim, and Stulz7, Pagano, Panetta, and Zingales8, and Hovakimian, Opler, and Titman9 all show evidence of firms' timing attempts. Bayless and Chaplinsky10 link the decision to issue seasoned equity with the costs of issue.

Prelude

More recently, Antoniou, Guney and Paudyal" examine how firms operating in capital marketoriented economies and bank-oriented economies determine their capital structure. They find that leverage is generally higher for larger firms with a lot of tangible assets, and lower for more profitable firms with growth opportunities in both types of economies. They also show that the capital structure of a firm is influenced by the institutions, the corporate governance practices, the tax systems, the borrower-lender relations, and the level of investor protection in the country in which the firm operates.

Dittmar and Dittmar12 show that economic expansion reduces the cost of equity relative to the cost of debt, inducing firms to issue equity. Alti and Sulaeman13 show that, when not accompanied by institutional purchases, stock price increases have little impact on the likelihood of equity issuance. Huang and Ritter14 find that firms are more likely to issue equity instead of debt when the implied equity risk premium is lower, the first-day return of IPOs is higher, the closedend fund discount is smaller, prior (future) market returns are higher (lower), and the expected default spread is higher. Hennessy, Livdan, and Miranda15 show that firms with negative private information have negative leverage, issue equity, and overinvest. Firms signal positive information by substituting debt for equity. Default costs induce such firms to underinvest. Yang16 shows that high stock returns predict equity issuance and that there is a negative relationship between profitability and both book and market leverage ratios. Morellec and Shürhoff17 find that firms with positive private information can credibly signal their type to outside investors using the timing of corporate actions and their debt-equity mix.

Guney and Iqbal-Hussein18 test for IPO market timing in the U.K. and show that firms go to the IPO market when the market is "Hot". They show that although there is evidence of timing, this does not affect firms' leverage ratios in the long-run. Babenko, Tserlukevich, and Wan19 demonstrate that current shareholders prefer repurchase timing and future shareholders prefer issuance timing. They find that large firms tend to favor existing shareholders by timing the market primarily through share repurchases, whereas small firms tend to favor future shareholders by timing the market through new issues. They also show that managers who time the market with repurchases are rewarded (with higher compensation), while managers who time the market with new issues are not rewarded.

As discussed above, several studies have shown evidence of equity market timing. However, as mentioned above, the results on the relation between market conditions and equity offerings are mixed. In this study, an attempt is made to clarify the issue by focusing on the U.S. IPO market and examine the relation between market conditions (i.e., level of interest rates) and IPO market activity. IPO market activity is measured in two broad ways:

* the size of the offering in U.S. dollars, and * the number of firms coming to the IPO market in a given month. …

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