The Timing of Equity Issuance: Adverse Selection Costs or Sentiment?

This study constructs a two-step model to test the most prominent market timing factors. We decompose equity issuances into 1) firm-specific components, which are predicted by firms’ characteristics, and 2) market-wide components, which are predicted by aggregate time series measures. Our evidence shows that, at the firm level, firms with higher market-to-book ratio, smaller size, more growth opportunities, and fewer tangible assets are more likely to issue equity. At the aggregate level, a greater proportion of firms issue equity in years with higher aggregate market-to-book ratio and lower asymmetric information. After controlling for the aggregate market-to-book ratio and information asymmetry, sentiment has no direct effect on equity issuance. This paper provides direct evidence that firms time their favorable market conditions to reduce adverse selection costs, and to exploit higher individual security valuations or capture growth opportunities