Insiders' response to market valuation, and the timing of equity-debt dual issues by Japanese firms

Abstract

This paper examines the mutual effects of market valuation and firm's internal performance on insiders' response to stock valuation, and on their financing decision. Estimates of logit equations explaining the financing decisions of JASDAQ firms 1999-2010 reveal some interesting patterns. Consistent with the pecking-order theory, when insiders perceive the stock is overvalued, they are more likely to issue dual or debt only, after fully utilize internal funds. Further, when insiders think that the stock is correctly valued concomitantly with outstanding internal performance, they are more likely to issue debt or dual rather than equity only. Conversely, consistent with the market-timing theory, insiders focus mainly on equity issues when they believe the stock is correctly valued but firm performance is relatively low. Moreover, firm size and tangibility of assets are decisive characteristics for dual issuers.