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Unformatted text preview: WEB CHAPTER II Financial Market Responses to Capital Structure Changes What we Know! web-capmktresponse.tex: Ivo Welch, 2004. Confidential: Access by Permission Only! last file change: Feb 5, 2006 (18:18h). compile date: Thursday 30 th March, 2006 (14:02h). This web chapter describes in much more detail the empirical evidence of how the financial markets react to the announcements of managerial capital structure actions. In particular, it explores how the stock market responds to new equity issues, new debt issues, and dividend payments. Our goal is to understand better the value consequences of such managerial actions, which in turn will help us to understand better why managers are doing what they are doing. 129 130 file=web-capmktresponse.tex: LP Web Chapter II. Financial Market Responses to Capital Structure Changes. 2 1. Value Changes at Announcements (Event Studies) We will use the event study technique, introduced in the efficient markets chapter, to explore Event studies can tell us whether some actions are value increasing or value decreasing... stock market responses to capital structure announcements. As you recall, an event study measures the stock returns of firms from just before an event disclosure to just after it, and attributes the value change to the event. It is a powerful technique, but not a perfect one. To run an event study, you should be aware of the following issues. We must to be able to clearly identify when the market learns of the event. Fortunately, we can identify event dates for three of the most important corporate finance events, which are the subject of our chapter: seasoned equity offerings, debt offerings, and dividend declarations. That is, we can usually ascertain quite precisely when firms announce that they will conduct these activities. Offerings must be filed with the SEC, and dividends are usually declared during an identifiable board meeting. To avoid insider trading regula- tions, firms are also usually careful not to disclose their intent earlier. Unfortunately, there are also many events that might have been interesting but for which we cannot find a specific event dateand so we cannot use the event study technique for them. For example, the non-announcement of a dividend has no event date. Employee compensation related share issuing and share repurchasing are usually done gradually and so have no sharp event date, either. We must isolate the events of interest from other important simultaneous announcements. For example, we know that M&A and capital structure activity can occur together. The simultaneity can make it difficult to disentangle whether such a stock price change is in response to the acquisition or the equity issue. If an acquisition has a positive value impact and an equity offering has a negative value impact, we might even attribute the incorrect sign to an event....
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- Spring '08