Investment opportunities, free cash flow, and stock valuation effects of secured debt offerings

Investment opportunities, free cash flow, and stock valuation effects of secured debt offerings This paper examines the role of investment opportunities and free cash flow in explaining the source of the stock valuation effects of secured debt offerings. We find a significantly positive relation between a firm's investment opportunities and its stock price response to announcements of secured debt issues. This evidence supports the investment opportunities hypothesis that secured debt financing is more valuable for issuing firms with high growth opportunities. In contrast, we find a lack of support for the free cash flow hypothesis. These findings hold even after controlling for other potentially influential variables. Our study provides a better understanding of the relative importance of various potential determinants in explaining the variation in the valuation impact of secured debt issues. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Review of Quantitative Finance and Accounting Springer Journals

Investment opportunities, free cash flow, and stock valuation effects of secured debt offerings

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Publisher
Kluwer Academic Publishers-Plenum Publishers
Copyright
Copyright © 2006 by Springer Science+Business Media, LLC
Subject
Finance; Corporate Finance; Accounting/Auditing; Econometrics; Operation Research/Decision Theory
ISSN
0924-865X
eISSN
1573-7179
D.O.I.
10.1007/s11156-006-0007-6
Publisher site
See Article on Publisher Site

Abstract

This paper examines the role of investment opportunities and free cash flow in explaining the source of the stock valuation effects of secured debt offerings. We find a significantly positive relation between a firm's investment opportunities and its stock price response to announcements of secured debt issues. This evidence supports the investment opportunities hypothesis that secured debt financing is more valuable for issuing firms with high growth opportunities. In contrast, we find a lack of support for the free cash flow hypothesis. These findings hold even after controlling for other potentially influential variables. Our study provides a better understanding of the relative importance of various potential determinants in explaining the variation in the valuation impact of secured debt issues.

Journal

Review of Quantitative Finance and AccountingSpringer Journals

Published: Dec 29, 2006

References

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