Financial constraints and security issuance

We examine the security issuance decisions of financially constrained firms. Since constrained firms are more susceptible to revenue management problems, our study sheds light on the financing behaviour of firms with revenue-related issues. Our results show that financially constrained firms obtain higher announcement returns than unconstrained firms when they issue bonds whereas the returns are similar when they issue stocks. Also, firms that face higher financial constraints are more likely to issue bonds than common stocks. We find that financially constrained firms assign different weights to the factors that affect the debt-equity choice than the weights assigned by unconstrained firms.