Scandinavian Working Papers in Economics

Discussion Papers,
Norwegian School of Economics, Department of Business and Management Science

No 2004/17: The choice of seasoned-equity selling mechanism: Theory and evidence

B. Espen Eckbo () and Øyvind Norli ()
Additional contact information
B. Espen Eckbo: Tuck School of Business, Dartmouth College, Postal: Tuck School of Business at Dartmouth , Hanover, NH 03755, USA
Øyvind Norli: Rotman School of Management, University of Toronto, Postal: Joseph L. Rotman School of Management, University of Toronto, 105 St. George Street, Toronto, Ontario, Canada M5S 3E6

Abstract: Extending the Myers and Majluf (1984) framework, we present a model for the choice of seasoned-equity selling mechanism. A sequential pooling equilibrium exists which implies a positive market reaction to certain flotation strategies. We examine the model implications using the market reaction to issues on the Oslo Stock Exchange using the full range of flotation methods. The average market reaction is non-negative across all methods, and significantly positive for both rights offerings and private placements, as predicted. We also show that average long-run abnormal stock returns to OSE issuers are indistinguishable from zero, supporting the market rationality assumption underpinning the flotation game.

Keywords: Seasoned-equity selling mechanism; Sequential pooling equilibrium; Oslo Stock Exchange; Flotation methods

JEL-codes: D50

54 pages, December 17, 2004

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