3. Estimate the parameter vector c, using a nonlinear weighted least squares
Ž .
regression of Eq. 11 for plausible values of H. Normalize by requiring p to Ž
. equal either
q1 or y1. As in Korajczyk et al. 1991 , we weight observations by the inverse of the standard deviation of the abnormal returns.
3. Seasoned equity issues and pre-issue information releases
Ž .
According to Myers and Majluf 1984 , stock prices fall when equity issues are announced because shareholders are aware that managers possess superior infor-
mation and interpret the decision to sell equity as evidence that the stock is Ž
. Ž
. overpriced. Korajczyk et al. 1992 extend the model of Myers and Majluf 1984
by explicitly assuming that the information asymmetry is time-varying. They suggest that firms can choose to issue equity when there is less information
asymmetry between managers and outside investors. In particular, their model
Ž . predicts that: 1 credible information releases can lessen the valuation uncertainty
about managers’ private information and hence reduce the price drop at subse- Ž .
quent issue announcements, and 2 the price drop at issue announcement in- creases with the time since the last information release.
Ž .
Ambarish et al. 1987 present a model in which firms achieve an efficient signaling equilibrium with two joint signals, i.e., dividends and sales of new
stocks. They argue that dividends and equity issues can collectively communicate private information at lower cost than new equity issues alone. Unlike the model
Ž .
Ž .
of Korajczyk et al. 1992 , Ambarish et al 1987 do not predict a direct relation between an issue announcement return and the time since the last dividend
announcement. In this paper, we test the predictions of these models by examining the effect of
earnings releases, dividend announcements, and stock split declarations on subse- quent seasoned equity issues. These three types of information releases are
particularly interesting because previous studies find that the timing of these Ž
. events is closely related to issue announcements Korajczyk et al. 1991 , Loderer
Ž .
Ž .
and Mauer 1992 and Guo and Mech 1997 . In addition, financial economists have proposed that these information releases convey credible information to
Ž .
shareholders. For example, Korajczyk et al. 1991 hypothesize that earnings Ž
. releases reduce asymmetric information. Miller and Rock 1985 and Healy and
Ž .
Palepu 1988 argue that dividends reduce uncertainty about earnings. Numerous papers suggest that stock splits are credible signals of favorable information,
Ž .
Ž .
including Grinblatt et al. 1984 , Lakonishok and Lev 1987 , Klein and Peterson Ž
. Ž
. Ž
. 1989 , Brennan and Copeland 1988 , and Brennan and Hughes 1991 .
We test whether these three types of information reduce the uncertainty about managers’ private information and mitigate the price drop that typically occurs at
the issue announcements. We also examine whether, as suggested by Korajczyk et
Ž .
al. 1992 , issue announcement returns are negatively related to the number of days between the information releases and subsequent issue announcements.
4. Data and sample
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