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Why would an announcement of a secondary equity offering send stock price down in an efficient market?

I understand that in an efficient market, overvaluation and undervaluation of stocks will not be possible because stocks will always trade at their intrinsic value. Therefore, information asymmetry is unlikely to be the reason for the price of the stock to go down. Could it then be the fear of share dilution?

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  • Increase in shares dilutes earnings and ownership, hence the frequent downward pressure. Commented Apr 21, 2019 at 2:48
  • thank u! could it also be because an announcement of secondary equity offering signals the possible liquidity issues the firm may face?
    – darren
    Commented Apr 21, 2019 at 2:52
  • Efficient market theory is something one might use to win 1 nobel prize with.. . not applicable in the real world.. Commented May 21, 2019 at 17:47

2 Answers 2

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An efficient market means that the price reflects all publicly available information. This is not incompatible with information asymmetry. Stocks move on announcements such as earnings surprises that are newly public.

The fact that a company sees the current price as a good one at which to sell its stock is, as you suggest, a signal that conveys something (negative at the margin) about the company's prospects as seen by insiders.

Dilution is not really the issue because, while existing shareholders will own a smaller fraction, the company will be bigger (richer) by the offering proceeds. The only reason these wouldn't cancel out is if investors revise their intrinsic valuation of the company.

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If you assume an efficient market... then the answer to your question is, it WILL NOT send the stock price down.

Why would an announcement of a secondary equity offering send stock price down in an efficient market?

There would be no dilution. In a magically efficient market, management would get equal value for the new stock offering, and the market would know and accept that. Therefore no dilution of values of existing shares would occur.

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