Title

The Costs of Issuing Common Equity: Information Asymmetry and Registration Choice

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Abstract

Theory suggests that adverse-selection costs of issuing equity should depend on firms’ information characteristics. We explore the relation between information asymmetry, the cost of issuing equity, and firms’ choices of registration strategies. We hypothesize and find that high information-asymmetry firms prefer a registration strategy requiring detailed advance disclosure and slow market access. Low information-asymmetry firms select a streamlined and quick registration strategy. High information-asymmetry firms, which experience modest stock-price declines when they choose the more regulated strategy to issue equity, suffer large declines with the deregulated strategy. Equity-issuance costs are strongly related to firms’ information characteristics and registration choices.

Disciplines

Business | Business Administration, Management, and Operations | Corporate Finance | Finance and Financial Management

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