POSITIVE INFORMATION FROM EQUITY ISSUE ANNOUNCEMENTS

The Myers and Majluf (1984) model predicts a nonpositive price reactio n to an announcement of a new issue of equity. This paper shows that t he Myers and Majluf result is a direct outcome of their assumption tha t all potential projects facing the firm have a nonnegative net presen t value. Refining the Myers and Majluf model, by allowing for the real istic possibility of potential projects having negative net present va lues, leads to different predictions. The refined model predicts posit ive as well as negative stock price responses, consistent with recent empirical evidence concerning the stock price effects of new stock iss ues.