EQUITY ISSUES AND TOBINS-Q - NEW EVIDENCE REGARDING ALTERNATIVE INFORMATION RELEASE HYPOTHESES

Announcements of seasoned equity offerings are associated with a statistically significant negative market reaction. This finding is consistent with both the cash flow signaling and the free cash flow hypotheses. We test these hypotheses by examining whether revisions in analyst earnings forecasts and abnormal stock returns associated with equity offering announcements are related to the issuing firm's q-ratio. We find an inverse relation between revisions in analysts' earnings forecasts and q-ratios, and no relation between announcement-period abnormal returns and q-ratios. These findings provide direct evidence of the cash flow signaling hypothesis and, at best, indirect evidence of the free cash flow hypothesis.