A number of empirical studies have documented cross-sectional patterns in the equity issue announcement effect.In general,these results show that there is less of a negative reaction when a firm can convince the market that there is a good reason for issuing equity,and there is a more negative reaction when good motivations are not obvious.Jung,Kim,and Stulz (1996) report that firms with a high q(market value-to-replacement cost),reflecting good investment opportunities,have an announcement effect that is insignificantly different from zero.Choe, Masulis,and Nanda (1993)document that the announcement effect is less negative when the economy is in an expansionary segment of the business cycle,when there may be less adverse selection risk. Korajczyk,Lucas,and McDonald (1991)report that the announcement effect is less negative if it follows shortly after an earnings report,at which time there is presumed to be less asymmetric information.Houston and Ryngaert(1997)provide direct evidence that adverse selection concerns explain part of the negative announcement effect.They study bank mergers, where common stock is the dominant means of payment to the shareholders of target banks. Some merger agreements specify that the target shareholders will receive a fixed number of shares in the acquiring bank(a fixed ratio stock offer),and other merger agreements specify a variable number of shares that add up to a fixed dollar amount(a conditional stock offer).If target shareholders are concerned that the acquirer is offering overvalued stock,the conditional stock offer provides protection against price drops.Consistent with adverse selection concerns, the announcement effect is-3.3%for fixed ratio stock offers,but only-1.1%for conditional stock offers. In general,studies find that larger issues have more negative effects.One problem with interpreting the relation between issue size and announcement effects is that if there is an unusually negative reaction,the issue size may be cut back by the time the deal is completed Since existing empirical studies do not take this endogeneity into account,the empirical estimates of the effect of issue size on the announcement are subject to a simultaneous equations bias.This bias results in an underestimate of the magnitude of the effect of issue size on the stock price.Thus,academics undoubtedly underestimate the degree to which the demand curve for a stock is negatively sloped. On the issue date,SEOs are,on average,sold at a discount of about 3%relative to the market price on the day prior to issuing(Corwin(2003),Mola and Loughran(2002)).Mola and Loughran report that the size of this discount has grown over time,and that there has been an increasing tendency to set the offer price at an integer.For example,in recent years a stock trading at $31.75 would very likely be priced at $30.00 or $31.00,whereas in the 1980s it would have been more likely to be priced at $31.00 or $31.50. 2.2 Evidence on long-run performance The long-run performance of SEOs has been the subject of a number of studies,all of which find that firms conducting SEOs typically have high returns in the year before issuing. For example,Loughran and Ritter(1995)report an average return in the year before issuing of 72%.During the five years after issuing,however,the returns are below normal (about 11%per 99 A number of empirical studies have documented cross-sectional patterns in the equity issue announcement effect. In general, these results show that there is less of a negative reaction when a firm can convince the market that there is a good reason for issuing equity, and there is a more negative reaction when good motivations are not obvious. Jung, Kim, and Stulz (1996) report that firms with a high q (market value-to-replacement cost), reflecting good investment opportunities, have an announcement effect that is insignificantly different from zero. Choe, Masulis, and Nanda (1993) document that the announcement effect is less negative when the economy is in an expansionary segment of the business cycle, when there may be less adverse selection risk. Korajczyk, Lucas, and McDonald (1991) report that the announcement effect is less negative if it follows shortly after an earnings report, at which time there is presumed to be less asymmetric information. Houston and Ryngaert (1997) provide direct evidence that adverse selection concerns explain part of the negative announcement effect. They study bank mergers, where common stock is the dominant means of payment to the shareholders of target banks. Some merger agreements specify that the target shareholders will receive a fixed number of shares in the acquiring bank (a fixed ratio stock offer), and other merger agreements specify a variable number of shares that add up to a fixed dollar amount (a conditional stock offer). If target shareholders are concerned that the acquirer is offering overvalued stock, the conditional stock offer provides protection against price drops. Consistent with adverse selection concerns, the announcement effect is –3.3% for fixed ratio stock offers, but only –1.1% for conditional stock offers. In general, studies find that larger issues have more negative effects. One problem with interpreting the relation between issue size and announcement effects is that if there is an unusually negative reaction, the issue size may be cut back by the time the deal is completed. Since existing empirical studies do not take this endogeneity into account, the empirical estimates of the effect of issue size on the announcement are subject to a simultaneous equations bias. This bias results in an underestimate of the magnitude of the effect of issue size on the stock price. Thus, academics undoubtedly underestimate the degree to which the demand curve for a stock is negatively sloped. On the issue date, SEOs are, on average, sold at a discount of about 3% relative to the market price on the day prior to issuing (Corwin (2003), Mola and Loughran (2002)). Mola and Loughran report that the size of this discount has grown over time, and that there has been an increasing tendency to set the offer price at an integer. For example, in recent years a stock trading at $31.75 would very likely be priced at $30.00 or $31.00, whereas in the 1980s it would have been more likely to be priced at $31.00 or $31.50. 2.2 Evidence on long-run performance The long-run performance of SEOs has been the subject of a number of studies, all of which find that firms conducting SEOs typically have high returns in the year before issuing. For example, Loughran and Ritter (1995) report an average return in the year before issuing of 72%. During the five years after issuing, however, the returns are below normal (about 11% per