Fin article 16 - Emily Yeo Finance 422 Raising Capital...

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Emily Yeo Finance 422 Raising Capital: Theory and Evidence Companies can raise capital by selling a variety of different securities. Along with choosing a type of security, management has to decide the best way to market the new security. This article examines the theory and evidence concerning the market’s response to security offer announcements, and evaluates various methods of marketing corporate securities. When deciding what type of security to sell, it is important to have a basic understanding of how the market typically reacts to the new securities. According to the table pictured in the article there is no evidence of a significant positive reaction. It shows that the market’s response to common stock issue is more strongly negative than the response to preferred stock or debt offerings. There are many potential explanations to these reactions. The first possible explanation is earning per share dilution. An increase in number of shares outstanding is expected to reduce earnings per share, and new equity is also expected to decrease ROE. These reductions in
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This note was uploaded on 12/06/2011 for the course FIN 422 taught by Professor Sridharsundaram during the Fall '09 term at Grand Valley State.

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Fin article 16 - Emily Yeo Finance 422 Raising Capital...

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