The Impact of Investor Demand on Security Offerings

The studies in this thesis contribute to a growing stream of papers showing that capital structure decisions are not only influenced by corporate determinants, but also by fluctuations in investor tastes and capital available for investment. This is a relatively new way of looking at corporate decisions, but is also given the deserved importance in the literature. This view contrasts with the traditional approach in the literature that largely considered corporate decisions to be distinct from the decision process of investors. Chapters 2 and 3 use convertible debt issuance to analyze the impact of intertemporal variation in investor demand on corporate decisions, and the market reaction to these decisions. Chapter 2 shows that convertible debt issuance, pricing, and design decisions are influenced by demand forces from investors. Chapter 3 finds that a shift in the convertible bond investor base from long-only investors towards convertible arbitrage funds resulted in an increasingly negative stock price reaction, induced by short-selling pressure. Thus, the first two studies in this thesis provide more evidence of corporate opportunism, using data on issuers of convertible debt. The fourth chapter uses data from repeat issuers of equity, and provides evidence in line with the hypothesis that investors take opportunism into account when firms issue new equity. In addition, the paper shows that firms’ choice of capital structure is influenced by their past behavior.

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