College of Business

We examine the relationship between the degree of informational asymmetry surrounding a firm and the equity market's reaction to a firm's announcement to sell seasoned securities. We use the adverse-selection component of the bid”ask spread as a proxy for the informational asymmetry of a firm. For equity offers, we find that the greater the change in information asymmetry at announcement, the greater the decline in wealth. In addition, the largest decline in wealth for seasoned equity announcements is observed for firms with the largest level of pre-event adverse-selection components. For debt offers, the wealth decline is only significant for firms with the largest pre-event levels of asymmetric information.