nep-fmk New Economics Papers
on Financial Markets
Issue of 2007‒07‒27
two papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Fundamentals, Market Timing, and Seasoned Equity Offerings By Harry DeAngelo; Linda DeAngelo; René M. Stulz
  2. Understanding the Forward Premium Puzzle: A Microstructure Approach By Burnside, A Craig; Eichenbaum, Martin; Rebelo, Sérgio

  1. By: Harry DeAngelo; Linda DeAngelo; René M. Stulz
    Abstract: Firms conduct SEOs to resolve a near-term liquidity squeeze, and not primarily to exploit market timing opportunities. Without the SEO proceeds, 62.6% of issuers would have insufficient cash to implement their chosen operating and non-SEO financing decisions the year after the SEO. Although the SEO decision is positively related to a firm's market-to-book (M/B) ratio and prior excess stock return and negatively related to its future excess return, these relations are economically immaterial. For example, a 150% swing in future net of market stock returns (from a 75% gain to a 75% loss over three years) increases by only 1% the probability of an SEO in the immediately prior year. Strikingly, most firms with quintessential "market timer" characteristics fail to issue stock and a non-trivial number of mature firms do issue stock, with current and former dividend payers raising more than half of all issue proceeds.
    JEL: G31 G32 G35
    Date: 2007–07
  2. By: Burnside, A Craig; Eichenbaum, Martin; Rebelo, Sérgio
    Abstract: High-interest-rate currencies tend to appreciate relative to low-interest-rate currencies. We argue that adverse-selection problems between participants in foreign exchange markets can account for this `forward premium puzzle.' The key feature of our model is that the adverse selection problem facing market makers is worse when, based on public information, a currency is expected to appreciate.
    Keywords: Exchange rates; microstructure; Uncovered interest parity
    JEL: F31
    Date: 2007–07

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