THE INFLUENCE OF PREDICTABILITY ON DIFFERENCES IN THE MARKET REACTION TO DEBT AND EQUITY ISSUE ANNOUNCEMENTS.

Existing empirical evidence suggests that the announcement-day reaction to equity issuance is about 2.88 percent more negative than the reaction to debt. However, announcement-day returns do not accurately reflect investor reaction if issue announcements are anticipated. I re-examine the announcement-day reaction to equity and debt issues after controlling for the predictability of security type and for firms' previous issue experience. Results indicate that the reaction to a first-time seasoned equity issue is more than 4. 15 percent more negative than the reaction to debt. This increase over the conventional estimate suggests that the reaction to equity may be more negative, relative to debt, than previously believed. The evidence supports the assertion that giving preference to debt over equity could reduce issue costs when asymmetric information is a problem. Timing and certification strategies for lowering issue costs appear to be relatively unimportant for debt issues. [ABSTRACT FROM AUTHOR]