Executive compensation structure and corporate equity financing decisions

Extending Myers and Majluf's ( 1984) model, we propose the market response to seasoned equity offering (SEO) announcements depends on the alignment of goals of managers and existing shareholders. We document a negative relation between the stock- market response to SEO announcements and issuing firm managers' equity-based compensation (EC). Relative to low-EC managers, the market perceives high-EC managers as issuing more- overvalued equity, benefiting existing shareholders and exacerbating the adverse selection problem for potential shareholders. We find EC and the market reaction to SEOs varies cross-sectionally with information asymmetry, investment opportunities, preissue stock-price run-up, and managerial ownership.