Do Distressed Firms Issue Common Equity Primarily through Private Markets?

Abstract

Existing literature generally finds that privately issuing firms are distressed while publicly issuing firms are not. These findings seem to suggest that distressed firms rely on private equity issuance as their main source of common equity financing. In this paper, I examine the distribution of public and private equity issuances against distress, in order to test whether distressed firms primarily rely on private equity issuance. Consistent with the literature, I find that private issuance frequencies increase as distress levels escalate, while public seasoned equity offerings (SEOs) are distributed evenly regardless of degree of distress. Despite this finding, my study also finds that public equity issuance still constitutes roughly half of total issuance frequencies for even the most distressed firms. These collective findings reject the incumbent hypothesis that distressed firms primarily issue equity privately, but instead suggest that both public and private equity are important tools of financing for distressed firms.