Article Abstract:
A model wherein the investment decision is differentiated from the financing decision and both decisions are influenced by market variables is presented. The basic premises for the study are that companies can choose to delay project development and that financial markets are characterized by imperfect competition. The delaying of the project development is prompted by the belief that the economy will improve. The delay, however, has the potential to substantially lessen the value of the project in the future. The imperfect competition in the financial markets, on the other hand, leads to financing of lower-quality projects with equity and higher-quality projects with debt. The empirical implications of the dynamic model include higher volume of financing during an economic expansion, higher proportion of projects financed with equity relative to debt and increased volume of both types of financing during stock market increases.
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Article Abstract:
Stockholders anticipate the misuse of funds generated for management use by equity issues, but condition their response to equity issue announcements on the basis of management's reputation for misusing free cash flow. Stockholder reaction at equity issue announcements is more favorable for those forms with records of acquiring assets that are related only to their core business than for all other companies. Stockholders' concerns about misuse of funds are somewhat lessened by the bonding of cash flows through debt issues.
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Article Abstract:
A study was conducted to analyze whether the timing of convertible debt issues can be explained by three reasons for its usage as a financial medium. The long-standing views that convertibles are utilized as 'debt sweeteners' and that there are 'hot issue' markets for these securities were examined. Results indicated that corporate managers issue convertible debt as debt sweeteners and that more convertible debt is issued in hot markets.
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