THE IMPLICATIONS OF EQUITY ISSUANCE DECISIONS WITHIN A PARENT-SUBSIDIARY GOVERNANCE STRUCTURE

We provide evidence about the motivation for a parent-subsidiary gover nance structure by analyzing valuation effects of seasoned equity offe rings by publicly traded affiliated units. Our results support Nanda's (1991) theoretical model which predicts equity offerings convey diffe rential information about subsidiary and parent value. Subsidiary equi ty issuance has negative valuation effects on issuing subsidiaries and positive effects on parents, while parent equity issuance reduces iss uing parent wealth and increases subsidiary wealth. Our evidence sugge sts that a parent-subsidiary organizational structure enhances corpora te financing flexibility and mitigates underinvestment problems identi fied by Myers and Majluf (1984). There is no evidence of subsidiary we alth expropriation.