FINANCING DECISIONS: WHO

ISSUES STOCK?
The modern corporate finance literature focuses on two competing
models to explain the financing decisions of firms. In the tradeoff
model, firms identify optimal leverage by weighing the costs and
benefits of an additional dollar of debt.
Myers (1984) advocates an alternative theory, the pecking order
model. The pecking order arises if the costs of issuing risky securities
—transactions costs and especially the costs created by
management's superior information about the value of the firm's
risky securities—overwhelm the costs and benefits proposed by the
tradeoff model.
The costs of issuing risky securities spawn the pecking order: firms
finance new investments first with retained earnings, then with safe
debt, then risky debt, and finally, but only under duress, with outside
equity.
In short, Myers (1984) presents the pecking order model as a theory
both about how firms finance themselves and about the capital
structures that result from pecking order financing. Subsequent tests
of the model follow these two routes.
We take a more direct approach. We test pecking order predictions
about financing decisions by examining how often and under what
circumstances firms issue and repurchase equity. We uncover what
seem to be pervasive contradictions of the model.

¿Cuando se debe endeudar una empresa?. ¿Cuando se necesita o cuando no se necesita?.

Net issues are common among firms with moderate leverage and
financing surpluses (earnings exceed the sum of dividends and
investment).
The fact that equity issues and repurchases are commonplace and
commonly not in line with the pecking order seems Iike a telling
blow to the argument of Myers (1984) and Myers and Majluf (1984)
that asymmetric information problems drive the capital structures of
firms.

Se endeuda de acuerdo a sus necesidades y las oportunidades del momento.

One story for our results is that there are important ways to issue
equity that avoid this problem.
But its implications become quite limited: firms do not follow the
pecking order in financing decisions; they simply avoid issuing equity
in ways that involve asymmetric information problems.
Stock issues to employees may not have an asymmetric information
problem. A firm nevertheless alters its capital structure when it
compensates employees with stock instead of cash—and chooses
not to offset the stock issues with repurchases.
The important point is that any forces that cause firms to deviate
systematically from pecking order financing (retained earnings, then
debt, and equity only as a last resort) imply that the pecking order
model, on its own, cannot explain capital structures.
 THE PECKING ORDER MODEL

Investors are aware of this asymmetric information problem, and the

prices of risky securities fall when new issues are announced.
Managers anticipate the price declines, and may forego profitable
investments if they must be financed with risky securities. To avoid
this distortion of investment decisions, managers follow what Myers
(1984) calls the pecking order. They finance projects first with
retained earnings, which have no asymmetric information problem,
then with Iow-risk debt, for which the problem is negligible, then
with risky debt. Equity is issued only under duress, or when
investment so far exceeds earnings that financing with debt would
produce excessive leverage.
If a firm announces a repurchase, investors assume managers have
positive information not reflected in the stock price, causing the
price to rise. This can deter the repurchase if the price rises above
what managers consider the equilibrium level. More important,
debt capacity is a valuable option for future financing.

¿Que determina el precio real de una acción? ¿ El precio de las acciones se determina a precio
de hoy o a precio de mañana.
First, Myers (1984) emphasizes asymmetric information problems,
but he recognizes that transactions costs alone can produce pecking
order financing if they are higher for debt than for retained earnings
and higher yet for equity. In Other words, asymmetric information
may be unnecessary.

Second, in Myers (1984) and Myers and Majluf (1984), the pecking
order arises through an implicit assumption that there is no way to
issue equity that avoids asymmetric information problems.
Firms to avoid issuing risky securities in ways that involve
asymmetric information problems, but financing decisions do not
follow the pecking order.
The capital structure literature focuses on SEOs as the source of
outside equity. There are at least seven other ways firms issue
equity:

Mergers via an exchange of stock

Employee stock options, grants, and Other employee benefit plans

Subscription rights issued to stockholders

Warrants attached to Other securities

Convertible bonds

Dividend reinvestment and Other direct purchase plans

Private placements.
Stock issues in direct purchase plans are initiated by the purchasers
(mostly existing stockholders), not by managers, so asymmetric
information problems may be absent.

Es una suposición…
Asymmetric information problems may be minor in stock-financed
mergers because mergers are negotiated between informed parties.
The information conveyed by any action depends on the market´s
expectations.
The discussion above suggests that the prime candidates for
breaking the grip of the pecking order are stock issues to employees.
In developing the pecking order model, Myers (1984) takes dividend
decisions as given and outside the purview of the model. T his is a
patch on the model, a tacit admission that tradeoff forces or Other
factors are important in dividend decisions since the asymmetric
information story in itself would predict that dividends (like
repurchases) are rare.
There is a second important patch. The concluding sections of Myers
(1984) and Myers and Majluf (1984) argue that firms want to avoid
debt that may result in distress that prevents them from exercising
future investment options.
 THE CHARACTERISTICS OF SAMPLE FIRMS
The profitability and growth characteristics of firms are central in
evaluating their financing decisions.