Re: Doug Henwood on SS and equity shares

[Ted Schmidt Economics & Finance <SCHMIDTP@xxxxxxxxxxxxxxxxxxxxxx>]

On 3/6 Basil writes:

>Doug
>I also did some work on this a long time ago. I remember new issues while
>low as a share of total funds were quite volatile, and in some years were
>important. Companies cannot permanently finance 90 % of new investment
>internally, or that would imply debt ratios of 10 %. Don't I remember
>corporate debt ratios are about 50%?  Basil Moore

A reply:
If you assume that corporations are financing 'all' of their assets with
new equity funds surely Basil would be correct, but corporations are
financing new 'fixed assets,' not working capital. Working capital is financed
with short term bank loans, accounts payable, accruals, etc--all measured
as short term debt. In this case we would see a significantly higher debt
ratio as observed.

Ted Schmidt

On another point (I'm not sure if Albus or Henwood wrote this):

>Why is this? For initial offerings, managers are often reluctant to share a
>good thing with outsiders. For seasoned offerings, there is a permanent
>depression of the stock price regardless of the quantity offered. As the
>standard biz school finance text (Brealey & Myers) puts it, "Economists who
>have studied new issues of common stock have generally found that
>announcement of the issue does result in a decline in the stock price. For
>industrial issues in teh United States this decline amounts to about 3
>percent. While this may not sound overwhelming, the fall in market value is
>equivalent to nearly a third of the new money raised by the issue." [Cites
>are in the text; I'm too lazy to type them.] Another reason is the perverse
>signalling effects: for an IPO, the question is, if you're biz is so hot,
>why are you sharing a piece of it with me?; for a seasoned offering,
>investors often take a stock offering as a sign that management thinks
>their share price is overvalued.
>
reply:
Historically the 'announcement effect' of new issues resulted in a decline
in the firm's stock price; however, after the debt binge of the 1980s, new
issues were welcomed by Wall Street--announcements of new issues were
associated with increases in stock prices.

Ted