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Abstract
This study examines time-series patterns of external financing decisions. We find that publicly traded U.S. firms fund a larger proportion of their financing deficit with net external equity when the expected equity market risk premium is lower and the first-day returns of initial public offerings are higher. Firms are also more likely to issue equity instead of debt when the closed-end fund discount is smaller, the size discount is larger, past market returns are higher, future market returns are lower, the average announcement effect of seasoned equity offerings is less negative, and the expected default spread is higher. These findings cannot be easily reconciled with the standard pecking-order theory or the static-tradeoff theory, but are consistent with the windows-of-opportunity theory, which suggests that firms prefer external equity when the cost of equity is low, and prefer debt otherwise.
