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Long-run underperformance of seasoned equity offerings: Fact or an illusion?

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Author Info

  • Allen, D.E.
  • Soucik, V.

Abstract

This paper uses Australian data from 1984 to 1993 to show that the long-run underperformance of seasoned equity offerings is related to the definition of ‘long-run’. We demonstrate that following the period delimited by other writers as the long-run, issuing firms turn around in their performance and in fact outperform their corresponding benchmarks, sometimes more than making up for the initial losses. We show that the initial underperformance affects the issues of companies performing more than one seasoned equity offering (SEO) in a similar fashion. Our results, the first to examine Australian long-run SEO performance, show that underperformance of Australian seasoned equity issues is dependent on the definition of the ‘long-run’. (Allen and Patrick [D.E. Allen, M. Patrick, Some further Australian evidence on the long-run performance of initial public offerings: 1974–1984, Pac. Basin Financ. Markets 2A (1996) 133–155. [1]] examined long-run IPO performance.) When long-run is defined as 12 years instead of the usual 5 years, SEOs can be clearly seen to turn around their performance particularly during years six and seven. A series of regression results point to a number of factors that bear influence on the extent of the initial underperformance. Decreased ex-ante uncertainty associated with older firms causes a negative relationship between the age and the extent of underpricing. Moreover, the greater is the SEO cost specifically associated with underpricing of the new equity, the greater is the underperformance that follows the issue.

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Bibliographic Info

Article provided by Elsevier in its journal Mathematics and Computers in Simulation (MATCOM).

Volume (Year): 78 (2008)
Issue (Month): 2 ()
Pages: 146-154

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Handle: RePEc:eee:matcom:v:78:y:2008:i:2:p:146-154

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Web page: http://www.journals.elsevier.com/mathematics-and-computers-in-simulation/

Related research

Keywords: Seasoned equity issues; Performance benchmarking; Underperformance;

References

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  1. Spiess, D. Katherine & Affleck-Graves, John, 1995. "Underperformance in long-run stock returns following seasoned equity offerings," Journal of Financial Economics, Elsevier, vol. 38(3), pages 243-267, July.
  2. Myers, Stewart C. & Majluf, Nicholas S., 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Journal of Financial Economics, Elsevier, vol. 13(2), pages 187-221, June.
  3. Brous, Peter Alan, 1992. " Common Stock Offerings and Earnings Expectations: A Test of the Release of Unfavorable Information," Journal of Finance, American Finance Association, vol. 47(4), pages 1517-36, September.
  4. Loughran, Tim & Ritter, Jay R, 1997. " The Operating Performance of Firms Conducting Seasoned Equity Offerings," Journal of Finance, American Finance Association, vol. 52(5), pages 1823-50, December.
  5. Ritter, Jay R, 1991. " The Long-run Performance of Initial Public Offerings," Journal of Finance, American Finance Association, vol. 46(1), pages 3-27, March.
  6. Robyn McLaughlin & Assem Safieddine & Gopala K. Vasudevan, 1996. "The Operating Performance of Seasoned Equity Issuers: Free Cash Flow and Post-Issue Performance," Financial Management, Financial Management Association, vol. 25(4), Winter.
  7. Stewart C. Myers & Nicholas S. Majluf, 1984. "Corporate Financing and Investment Decisions When Firms Have InformationThat Investors Do Not Have," NBER Working Papers 1396, National Bureau of Economic Research, Inc.
  8. Myers, Stewart C. & Majluf, Nicolás S., 1945-, 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Working papers 1523-84., Massachusetts Institute of Technology (MIT), Sloan School of Management.
  9. Asquith, Paul & Mullins, David Jr., 1986. "Equity issues and offering dilution," Journal of Financial Economics, Elsevier, vol. 15(1-2), pages 61-89.
  10. Ritter, Jay R, 1984. "The "Hot Issue" Market of 1980," The Journal of Business, University of Chicago Press, vol. 57(2), pages 215-40, April.
  11. Mikkelson, Wayne H. & Partch, M. Megan, 1986. "Valuation effects of security offerings and the issuance process," Journal of Financial Economics, Elsevier, vol. 15(1-2), pages 31-60.
  12. Loughran, Tim & Ritter, Jay R, 1995. " The New Issues Puzzle," Journal of Finance, American Finance Association, vol. 50(1), pages 23-51, March.
  13. Loughran, Tim & Ritter, Jay R. & Rydqvist, Kristian, 1994. "Initial public offerings: International insights," Pacific-Basin Finance Journal, Elsevier, vol. 2(2-3), pages 165-199, May.
  14. Masulis, Ronald W. & Korwar, Ashok N., 1986. "Seasoned equity offerings : An empirical investigation," Journal of Financial Economics, Elsevier, vol. 15(1-2), pages 91-118.
  15. Conrad, Jennifer & Kaul, Gautam, 1993. " Long-Term Market Overreaction or Biases in Computed Returns?," Journal of Finance, American Finance Association, vol. 48(1), pages 39-63, March.
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