Events

Professor Anton Tsoy
Assistant Professor of Financial Economics
University of Toronto

Small high-growth companies often sell common shares to cover repeated cash needs. This is surprising, as the classical theory predicts debt in such environments. We present a model, in which the firm’s owner in anticipation of several liquidity shocks designs securities to sell to outsiders and her private signal about firm’s cash flows. We show that it is optimal to use common equity as an ATM: as shocks arrive, the owner covers them by selling common shares. Under an optimal signal, selling common shares does not hurt liquidity of future share issues, which is generally not true for other securities.