Net Worth and Total Liabilities to fixed assets NWTLFA Gross Profit to Sales GPS
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phenomena have been offered. The first is predicated on rational investor behavior and argues that the low average
returns are commensurate with the issuing firms’ risk characteristics, as captured, for example, by size and book-to-
market. The second argues that firms are able to time their equity offerings and raise capital by selling overvalued equity.
Thus, the poor long-term performance of the equity issues reflects the gradual correction of asset prices to their true
fundamental value and any correlation with firm characteristics is more indicative of security mispricing, as opposed to
additional dimensions of systematic risk. Firms conducting initial and seasoned equity offerings
have historically experienced relatively low long-run equity returns. To date, there is lack of consensus as to whether low
average returns are due to mispricing or that these returns rationally reflect the risk characteristics of the issuing firms. By
examining how institutional lenders perceive the risk of issuing and non-issuing firms we are able to shed new light on this
issue. We have examined how institutional lenders perceive the risk of equity-issuing firms relative to non-issuing firms by
focusing on the pricing and contract structure of loans to these two groups of firms. We find, first, that equity-issuing and
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otherwise similar non-issuing firms face comparable yields on their loans, even after adjusting for default risk and accounting
for potential endogeneity between the various components of the loan contract. Alon Brav : 2006