INITIAL CORPORATE DEBT OFFERINGS, CERTIFICATION AND EQUITY VALUATION

An analysis of the effects of initial corporate debt offerings on the stock prices of industrial firms is presented. Empirical results from 171 initial debt offerings support the hypotheses that: 1. informational asymmetry between management and lenders can cause an adverse market reaction, and 2. the more predicable the offering, the smaller the observed stock price change. The market cannot fully anticipate all the important details of initial offerings before they are made public on the issuance date. The flotation cost effect on a firm's stock price is also evaluated. Insignificant regression relationships between flotation cost and abnormal returns show that it is economical and rational to substitute public debt for private debt.