Internal equity issuances and capital structure

Stephen B McKeon, Purdue University

Abstract

Internal equity issuances (IEIs) are the single largest source of equity capital in-flows for many firms, and, in aggregate, exceed the total cash raised from public markets through seasoned equity offerings. IEI proceeds are driven by the exercise of employee stock options, and are received passively because the proceeds are inter-temporally separated from the financing and pricing decisions. I provide a new definition of equity issuance that more accurately distinguishes passive and active equity issuances. Exploiting this variation offers a new tool for assessing models of financing choice and tests of capital structure. I show that market timing variables used in prior literature do not have the power to distinguish between active and passive issuances, casting doubt on the empirical evidence supporting the market timing hypothesis. The potential for flawed inference is not limited to market timing and can affect any study that fails to account for the passive component in equity issuance data.

Degree

Ph.D.

Advisors

Denis, Purdue University.

Subject Area

Commerce-Business|Finance

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