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. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Review of Quantitative Finance and Accounting Springer Journals

Internal versus External Equity Funding Sources and Earnings Response Coefficients

Loading next page...
 
/lp/springer_journal/internal-versus-external-equity-funding-sources-and-earnings-response-yAts2wFg33
Publisher
Kluwer Academic Publishers
Copyright
Copyright © 2001 by Kluwer Academic Publishers
Subject
Finance; Corporate Finance; Accounting/Auditing; Econometrics; Operation Research/Decision Theory
ISSN
0924-865X
eISSN
1573-7179
D.O.I.
10.1023/A:1008336323282
Publisher site
See Article on Publisher Site

Abstract

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.

Journal

Review of Quantitative Finance and AccountingSpringer Journals

Published: Oct 3, 2004

References

You’re reading a free preview. Subscribe to read the entire article.


DeepDyve is your
personal research library

It’s your single place to instantly
discover and read the research
that matters to you.

Enjoy affordable access to
over 18 million articles from more than
15,000 peer-reviewed journals.

All for just $49/month

Explore the DeepDyve Library

Search

Query the DeepDyve database, plus search all of PubMed and Google Scholar seamlessly

Organize

Save any article or search result from DeepDyve, PubMed, and Google Scholar... all in one place.

Access

Get unlimited, online access to over 18 million full-text articles from more than 15,000 scientific journals.

Your journals are on DeepDyve

Read from thousands of the leading scholarly journals from SpringerNature, Elsevier, Wiley-Blackwell, Oxford University Press and more.

All the latest content is available, no embargo periods.

See the journals in your area

DeepDyve

Freelancer

DeepDyve

Pro

Price

FREE

$49/month
$360/year

Save searches from
Google Scholar,
PubMed

Create lists to
organize your research

Export lists, citations

Read DeepDyve articles

Abstract access only

Unlimited access to over
18 million full-text articles

Print

20 pages / month

PDF Discount

20% off