Short-cuts in issuance decisions and subsequent small firm performance |
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Authors: | Mike Cudd Marcelo Eduardo Lloyd Roberts |
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Institution: | (1) Mississippi College, Box 4014, Clinton, MS 39058, USA |
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Abstract: | This paper examines the subsequent change in performance characteristics of companies that make security issuance choices
consistent with “following the herd.” It extends the literature on decision heuristics (i.e., decision short-cuts) by exploring
the outcome of mimicking behavior. Results suggest that firms that issue equity in an environment consistent with mimicking
are associated with subsequent increased risk of bankruptcy relative to their non-mimicking counterparts. Moreover, the results
also suggest that these mimicking actions are not associated with subsequent changes in profitability. This gives support
to the argument that decision short-cuts produce suboptimal results. Moreover, the effect is concentrated in very small (i.e.,
micro-cap) companies, but not present for companies in larger size categories. Similar patterns for debt issuers who mimic
competitors are not observed, which may reflect the greater scrutiny imposed by lenders and debt under-writers with regard
to debt issuances.
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Keywords: | Financial economics Capital and ownership structure |
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