322 B.E. Eckbo et al.
Ta b l e 1 5
Average market reaction (AR, %) to announcements of debt offerings by U.S. firmsStudy Sample
size
Sample
periodAR
(%)(a) Stock price reaction to straight debt offerings:N= 3 ,041;ARsd=− 0. 22
Dann and Mikkelson (1984) 150 1969–1979 − 0. 37 ∗
Mikkelson and Partch (1986) 171 1972–1982 − 0. 23
Eckbo (1986) 648 1964–1981 − 0. 10
Hansen and Crutchley (1990) 188 1975–1982 0. 11
Shyam-Sunder (1991) 297 1980–1984 − 0. 11
Chaplinsky and Hansen (1993) 245 1974–1984 0. 05
Johnson (1995) 129 1977–1983 0. 32
Jung, Kim, and Stulz (1996) 276 1977–1984 − 0. 09
Howton, Howton, and Perfect (1998) 937 1983–1993 − 0. 50 ∗
(b) Stock price reaction to convertible debt offerings:N=307;ARcd=− 1. 8 ∗
Dann and Mikkelson (1984) 132 1969–1979 − 2. 30 ∗
Mikkelson and Partch (1986) 33 1972–1982 − 1. 97 ∗
Eckbo (1986) 75 1964–1981 − 1. 25 ∗
Hansen and Crutchley (1990) 67 1975–1982 − 1. 45 ∗
In the panel headings,Nis the aggregate sample size across all studies in the panel, andARis sample-weighted
average market reaction. The superscript*indicates that theARis significantly different from zero at the 1%
level. The table focuses on studies that use daily stock return to measure the SEO announcement effectAR,
and where the flotation method may be reasonably deduced from the sample selection criteria. Some studies
measureARover the two-day window [− 1 ,0], while others use a three-day window [− 1 ,+1], and the table
does not make a distinction between these. Some studies also separate out industrials from utilities, and when
they do, we report results averaged across both issuer types.
4.4.3. Market reaction to corporate debt offerings
The basic adverse selection argument ofMyers and Majluf (1984)strongly suggests
that the market reaction to security offerings should be smaller the lower the risk that
the security is overpriced. This implication is also a basic motivation for the financing
pecking order ofMyers (1984). Given the predictable contractual payment stream em-
bedded in a debt contract—protected by bankruptcy law—the risk of market mispricing
is almost certainly lower for a corporate debt instrument than for common stock. Thus,
the market reaction to debt issues should therefore be smaller than for equity.
Table 15lists studies reporting the stock-price announcement effect of straight and
convertible debt offerings by U.S. firms. In Panel (a), the overall evidence is of a sta-
tistically insignificant market reaction to straight debt issuances.Dann and Mikkelson
(1984)report a significantly negative average abnormal stock return of− 0 .37%, while
Howton, Howton, and Perfect (1998)also report significantly negative market reaction
of− 0 .50% over the two-day announcement period. However, the average market reac-