Executive Compensation Structure and Corporate Equity Financing Decisions

Sudip Datta, Mai Iskandar-Datta and Kartik Raman
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Sudip Datta: Wayne State University
Mai Iskandar-Datta: Wayne State University
Kartik Raman: Bentley College

The Journal of Business, 2005, vol. 78, issue 5, 1859-1890

Abstract: Extending Myers and Majluf's (1984) model, we propose the market response to seasoned equity offering (SEO) announcements depends on the alignment of goals of managers and existing shareholders. We document a negative relation between the stock-market response to SEO announcements and issuing firm managers' equity-based compensation (EC). Relative to low-EC managers, the market perceives high-EC managers as issuing more-overvalued equity, benefiting existing shareholders and exacerbating the adverse selection problem for potential shareholders. We find EC and the market reaction to SEOs varies cross-sectionally with information asymmetry, investment opportunities, preissue stock-price run-up, and managerial ownership.

Date: 2005
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Citations: View citations in EconPapers (9)

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Persistent link: https://EconPapers.repec.org/RePEc:ucp:jnlbus:v:78:y:2005:i:5:p:1859-1890

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