Internal versus External Equity Funding Sources and Earnings Response Coefficients

Internal versus External Equity Funding Sources and Earnings Response Coefficients Because of transactions costs andinvestor/manager information asymmetries, internallygenerated funds should be less costly than fundsraised by issuing common shares. This suggests thatas firms use more internal funds relative toexternal equity, their costs of equity capital willfall and the rate the market uses to discountunexpected earnings of such firms will be lower. Wehypothesize that (1) firms having a higherproportion of internal to external equitywill have larger earnings response coefficients, and(2) this effect will be magnified for high growthfirms since the disparity between inside informationand publicly available information about high growthfirms' investment opportunities is greatest. Wefind support for both hypotheses using pooled andannual cross-sectional regressions after controllingfor other determinants of ERCs. The results arealso generally robust to alternative measures of themix of equity funding sources and of unexpectedearnings and to consideration of other factorsaffecting the mix of equity capital. Review of Quantitative Finance and Accounting Springer Journals

Internal versus External Equity Funding Sources and Earnings Response Coefficients

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Kluwer Academic Publishers
Copyright © 2001 by Kluwer Academic Publishers
Finance; Corporate Finance; Accounting/Auditing; Econometrics; Operation Research/Decision Theory
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