2.1 Announcement effectsNumerous studies have documented that in the USA there is an announcement effect of -2 %, on average, for SEOs.The most popular explanation among academics for this negative announcement effect is that of the Myers and Majluf ( 1984) adverse selection model.Myers and Majluf assume that management wants to maximize the wealth of its existing shareholders in the long run.At any point in time, however, the current market price may be too high or too low relative to management's private information about the value of assets in place.In other words, strong-form market inefficiency is being assumed.If management thinks that the current market price is too low, the firm will not issue undervalued stock, for doing so dilutes the fractional ownership of existing shareholders.If management thinks that the current stock price is too high, however, the firm will issue equity if debt financing is not an option.Rational investors, knowing this decision rule, therefore interpret an equity issue announcement as conveying management's opinion that the stock is overvalued, and the stock price falls.