Question

Which of the following have been offered as justification for stock price declines following an SEO announcement?

1. I. Investors assume managers issue stock when shares are overvalued.
2. II. Corporate taxes imposed on stock offerings lower the value of the issuer's cash flows.
3. III. Issuing equity may be considered a signal that the issuer has too much debt.
4. IV. Issue costs reduce the value of the issuing firm.

Multiple Choice

• I and III only

• II and IV only

• I, III, and IV only

• II, III, and IV only

• I, II, III, and IV

Answer 1

Reasons why stock prices decrease with SEO announcement:

Information Asymmetry: Managers tend to issue equity when the firm is overvalued. Investors learn that firm is overvalued and thus price drops.

Debt Usage: Equity issues might indicate that the firms has too much debt or is suffering from liquidity issues. Its risk maybe higher and again the manager signals this poor financial health by trying to seek out equity investors.

Issue Costs: When a corporation issues securities there are costs associated with that action.

.

So the answer is I,III and ,IV only.

.

Justification for stock price declines following an SEO announcement are as follows:

I. Investors assume managers issue stock when shares are overvalued.

III. Issuing equity may be considered a signal that the issuer has too much debt.

IV. Issue costs reduce the value of the issuing firm.