Security Issuances in Hot and Cold Markets

Overwhelming evidence indicates that firms time market conditions to issue equity. I investigate the motivations for security issuances in hot and cold markets. While it is commonly believed that firms tend to exploit overvaluations to issue equity and overinvest in so-called 'hot' markets, which often results in lower future returns, I show that security issuances in certain periods with lower adverse selection costs are motivated by fundamentals such as capital expenditures and financial constraints, and that these issuances can create shareholder wealth. In contrast, firms that issue equity during periods of high sentiment experience a decline in future returns.