Do Firms Issue More Equity when Markets are More Liquid?

This paper investigates how public equity issuance is related to changes in stock market liquidity. Using quarterly data on IPOs and SEOs in 36 countries over the period 1995-2008, we show that equity issuance is significantly and positively related to contemporaneous and lagged changes in aggregate local market liquidity. This effect survives the inclusion of proxies for market timing, capital market conditions, growth prospects, asymmetric information, and investor sentiment. Liquidity considerations are as important in explaining equity issuance as market timing considerations. The effect of liquidity is driven by quarters with the greatest deterioration in liquidity and is stronger for IPOs than for SEOs. Firms are more likely to carry out private instead of public equity issues and to postpone or cancel public equity issues when market liquidity worsens. Overall, we interpret our findings as evidence that market liquidity is an important determinant of equity issuance that is distinct from other determinants examined to date.

Mathijs A. van Dijk is an Associate Professor of Finance at the Rotterdam School of Management, Erasmus University. He obtained his MSc in Econometrics (Cum Laude) from Erasmus University in 1996 and his PhD in Finance from Maastricht University in 2002. He spent the Fall of 1999 as a visiting doctoral student at Princeton University. Van Dijk was a visiting scholar at the Fisher College of Business at Ohio State University during the academic year 2005-2006 and at the Fuqua School of Business at Duke University in the period January-April 2008. His research focuses on international finance and investments. He has published in various journals in financial economics, including the Financial Analyst Journal, the Journal of Banking and Finance, the Journal of International Money and Finance, and the Review of Finance. Van Dijk has presented his work at numerous international conferences as well as during seminars at, among others, Dartmouth, Harvard, and INSEAD. In 2008 he received a 600.000 euro Vidi-grant from NWO (the Dutch National Science Foundation) for a five-year research program on liquidity black holes.