Inferring Accounting Information from Corporate Financing Choices: An Examination of Security Issuances in the Banking Industry.

This study examines the impact of regulatory capital and several of its determinants on bank managers' financing decisions and investors' interpretations of those decisions. The analysis is related to 2 streams of research. This study adds to the corporate finance literature that seeks to explain the market's reaction to security issuances by developing and testing a refined set of predictions of the demand for debt and equity capital using a sample of capital-regulated firms. It was found that bank managers' financing choices reflect their private information regarding the levels of regulatory capital, earnings and charge-offs in the issuance year. a negative market reaction to capital-increasing issuances and a positive reaction to capital-decreasing issuances are documented.