The impact of market conditions on equity issuance activity

We expand on the existing finance literature pertaining to equity issuance activity by controlling for look-ahead bias in our analysis. We condition on equity market information available to the firm's management at the time of equity issuance, and thus more accurately assess possible issuance timing motives. In order to determine if managements' issuance decision is affected by investment requirements or by market timing motives we consider the firms' capital allocation choices. Furthermore, instead of characterizing issuance markets based on issuance volume, as has been the traditional approach, we define the issuance markets based on a market-to-book valuation metric. We classify issuance markets in this manner as much of the behavioral finance literature associates high valuations with market timing and our analysis shows that market classification based on valuation cause in the Granger sense market classification based on issuance volume.;For IPOs we provide evidence, based on issuer's capital allocation choices and in particular on excessive cash holdings, that the firm's desire to take advantage of favorable market valuations is a more important factor affecting issuance activity during high valuation markets. During low valuation markets the need for investment capital is a more important consideration for firms going public. When SEOs are considered we do not find clear evidence that factors affecting equity issuance vary considerably across high and low valuation markets. For both IPOs and SEOs our findings are at odds with the notion that the reason for raising equity financing is entirely driven by fundamental factors; rather it appears that mispricing is a persistent factor affecting valuations and equity issuance for equity issuers.