Self-Selection and Stock Returns Around Corporate Security Offering Announcements

Stock returns around security offering announcements are conditional on firms' self selection into a particular security type. We use a switching regression methodology on a data set of U.S. straight debt, convertible debt, and seasoned equity offerings to estimate counterfactual announcement returns that would be obtained had the same firms instead opted for alternative financing. Our evidence is consistent with firms choosing the financing type with the least negative expected announcement effect. Our results justify some observed pecking order behavior patterns better than do actual announcement effects, yet also suggest that for some firms equity-like financing may be preferred to debt-like financing.