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Market Reaction to Capital Structure Changes and its Association with Profits, Cashflow and Dividends

Michael S. Long (Rutgers University)
Ileen B. Malitz (Fairleigh Dickinson University)
Stephen E. Sefcik (University of Washington.)

Managerial Finance

ISSN: 0307-4358

Article publication date: 1 May 1992


We provide evidence of stock market performance prior to announcements of the assuance or retirement of securities which is consistent with Myers and Majluf [1984] and Miller and Rock [1985]. Stocks of firms issuing seasoned common equity are significantly over‐valued in the market prior to the issue, but in the year following, decline to their original level. Stocks of firms issuing convertible debt also are over‐valued, but to a lesser degree than that of firms issuing seasoned equity. Stock of firms issuing straight debt appears to be neither over‐valued nor undervalued. The after‐market firm performance, measured by earnings, cash flows or dividends, is consistent with Miller and Rock. We document a decline in after‐market performance for firms issuing convertible or straight debt and an improvement for those repurchasng shares. However, contrary to predictions, we find that firms issuing seasoned equity do not have lower earnings or cash flows in the following year, and increase their rate of dividend payment as well. We document evidence indicating that firms issue equity to maintain or increase dividends. The market anticipates the dividend increase and shows no response to announcements of dividend changes following an equity issue. However, we are unable to explain why the market reacts in such a negative manner to equity issues, when the after‐market performance of the firm is as expected.


Long, M.S., Malitz, I.B. and Sefcik, S.E. (1992), "Market Reaction to Capital Structure Changes and its Association with Profits, Cashflow and Dividends", Managerial Finance, Vol. 18 No. 5, pp. 31-61.




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