Empirical evidence suggests that the market price of a ﬁrm's existing shares is most likely to decline
upon the announcement of a new equity issue. Management will issue equity only when it believes
that existing shares are undervalued has been advanced as a possible explanation for this
phenomenon.

Question

Quizplus · Accepted Answer

The statement is incorrect. The market price of a firm's existing shares may actually increase upon the announcement of a new equity issue if investors perceive that the funds raised will be used productively and will increase the long-term value of the firm. The phenomenon of the market price declining upon equity issuance may be due to other factors such as dilution of earnings, increased risk, or signaling of overvalued shares by management.

Empirical Evidence Suggests That the Market Price of a ﬁRm's