Question

Below is the market reaction in term of the change of stock price to different activities adopted by firms. For example, the stock price decreases on average 3% when a firm announces a seasoned equity offering; the stock price increases on average 5% when a firm announces stock repurchase.

Issuing seasoned equity -3% reaction on average

Issuing public bonds 0% reaction on average

Issuing bank loans +2% reaction on average

Announcing stock repurchase +5% reaction on average

Can you provide rational explanation on these phenomena using corporate finance theories?

Answer 1

When a company offering a seasoned equity , stock price on average 3% ie the stocks are issuing at 3 % discount it will increase purchase in trading quantity in the market and the equity holders may bear 3% capital loss. Likewise if it repurchases the stocks at increase of 5% ie at a premium of 5% volume of selling will increase while trading and the equity holders have a capital gain of 5%. While issuing public bonds at 0% reaction equity stock price would be go on consistent. While issuing bank loans +2% reaction it will decrease the dividend and considerably affect the value of seasoned offering of shares.