Security Choice, Information Effects and Firm Characteristics: A Factor Analytic Approach

Abstract:  We examine the marginal choice between debt and equity securities using a factor analytic approach. This data reduction property eliminates the need to select the one best variable to proxy for a particular theoretical construct. Our results reinforce numerous existing findings using traditional methods and suggest both static tradeoff and asymmetric information based considerations are relevant in determining security choice. Two new results are presented related to the accounting liquidity of the firm. First, the preference for equity is increasing with liquidity as suggested by the window of opportunity hypothesis. Secondly, the market response to equity issuance announcements is inversely related to the liquidity of the firm. Profitability and growth measures support Jensen's (1986) agency cost of free cash flow as a potential explanation for the second finding. Copyright Blackwell Publishers Ltd, 2004.

The Impact of Mandated Cash Flow Disclosure on Bid-Ask Spreads

This study provides evidence that mandatory cash flow disclosure required by Approved Australian Accounting Standard "AASB 1026, Statement of Cash Flows"(June 1992) was associated with a decline in bid-ask spreads following the introduction of the regulation, even after controlling for changes in trading volume and price volatility. More pronounced decreases in bid-ask spreads were associated with firms having lower correlations between reported CFO and estimates of CFO using balance sheet reconstructions. We conclude that mandatory cash flow disclosure reduces information asymmetry across market participants. Copyright Blackwell Publishers Ltd, 2005.