THE IMP ACT OF INFORMATION ASYMMETRY ON THE NEW EQUITY ISSUE TIMING

Undervaluation of the firm coupled with the information asymmetry between the issuing firm's management and market investors might be the reasons why new equity issues, on average, are preceded by a large and extended abnormal price rise in the market. If a firm is undervalued (i.e. the intrinsic value of the firm is above its market value) and new equities are needed to finance a new project, the current equity holders would lose a portion of the originally undervalued part after the gap between the market value and the intrinsic. value is eliminated. To avoid this disadvantageous information asymmetry, issuing firm's management is motivated to release inside information to bid up the firm's stock price so that new equity issue will be more beneficial to the issuing firm.