THE IMPACT OF INFORMATION ASYMMETRY ON THE NEW EQUITY ISSUE TIMING
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Undervaluation of the firm coupled with the information asymmetry between the issuing firm s management and market investors might be the reasons why new equity issues, on average, are preceded by a large and extended abnormal price rise in the market. Ifa firm is undervalued {i.e. the intrinsic value ofthe firm is above its market value) and new equities are needed to finance a new project, the current equity holders would lose a portion ofthe originally undervaluedpart after the gap between the market value and the intrinsic. value is eliminated. To avoid this disadvantageous information asymmetry, issuing firm s management is motivated to release inside information to bid up the firm s stock price so that new equity issue will be more beneficial to the issuing.firm.
Abstract
Undervaluation of the firm coupled with the information asymmetry between the issuing firm s management and market investors might be the reasons why new equity issues, on average, are preceded by a large and extended abnormal price rise in the market. Ifa firm is undervalued {i.e. the intrinsic value ofthe firm is above its market value) and new equities are needed to finance a new project, the current equity holders would lose a portion ofthe originally undervaluedpart after the gap between the market value and the intrinsic. value is eliminated. To avoid this disadvantageous information asymmetry, issuing firm s management is motivated to release inside information to bid up the firm s stock price so that new equity issue will be more beneficial to the issuing.firm.