Equity ATMs - Anton Tsoy (University of Toronto)

Abstract: A firm anticipates several liquidity shocks. To cover these shocks, the owner optimally designs her private signal about firm's cash flows and securities to sell to outsides. In the optimum, the owner uses common equity as an ATM: as shocks arrive, she gradually covers them by selling common shares to outsiders. Under an optimally designed signal, selling common shares does not hurt liquidity of future share issues, which is generally not true for other securities.

Optimality of common equity aligns with the practice of repeated PIPE offerings and SEOs, which is unexplained by existing theories.