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Long-Run Performance Of Stock Returns Following Junk Bond Offerings

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Author Info
AUGUSTO CASTILLO R. () (Escuela de Administración, Pontificia Universidad Católica de Chile)
Abstract

This paper examines the long-run, post-issue stock price performance of 377 firms that issued below-investment-grade bonds during the 1976- 1989 period. Three different methodologies are used, that control for the usual sources of bias affecting long run performance studies (new listing bias, rebalancing bias, skewness bias, and non-random sampling bias). The three show very similar results. The buy and hold abnormal returns are significantly different from zero and negative starting from the fourth year after the issue, supporting to what we have called the cyclical over-optimism hypothesis which basically states that there is a cycle in financing, and that in some phases of the cycle investors will be willing to accept paper that is overpriced.

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Publisher Info
Article provided by Escuela de Administracion. Pontificia Universidad Católica de Chile. in its journal ABANTE.

Volume (Year): 4 (2001)
Issue (Month): 1 ()
Pages: 95-129
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Handle: RePEc:pch:abante:v:4:y:2001:i:1:p:95-129

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Related research
Keywords: Junk Bond Offerings; Long-Run Stock Performance;

Find related papers by JEL classification:
G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies
G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Capital and Ownership Structure

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  1. Asquith, Paul & Mullins, David W, Jr & Wolff, Eric D, 1989. " Original Issue High Yield Bonds: Aging Analyses of Defaults, Exchanges, and Calls," Journal of Finance, American Finance Association, vol. 44(4), pages 923-52, September. [Downloadable!] (restricted)
  2. Fama, Eugene F. & French, Kenneth R., 1993. "Common risk factors in the returns on stocks and bonds," Journal of Financial Economics, Elsevier, vol. 33(1), pages 3-56, February. [Downloadable!] (restricted)
  3. Eckbo, B. Espen, 1986. "Valuation effects of corporate debt offerings," Journal of Financial Economics, Elsevier, vol. 15(1-2), pages 119-151. [Downloadable!] (restricted)
  4. Brown, Stephen J. & Warner, Jerold B., 1980. "Measuring security price performance," Journal of Financial Economics, Elsevier, vol. 8(3), pages 205-258, September. [Downloadable!] (restricted)
  5. Altman, Edward I, 1989. " Measuring Corporate Bond Mortality and Performance," Journal of Finance, American Finance Association, vol. 44(4), pages 909-22, September. [Downloadable!] (restricted)
  6. Fama, Eugene F., 1998. "Market efficiency, long-term returns, and behavioral finance1," Journal of Financial Economics, Elsevier, vol. 49(3), pages 283-306, September. [Downloadable!] (restricted)
    Other versions:
  7. Asquith, Paul & Gertner, Robert & Scharfstein, David, 1994. "Anatomy of Financial Distress: An Examination of Junk-Bond Issuers," The Quarterly Journal of Economics, MIT Press, vol. 109(3), pages 625-58, August. [Downloadable!] (restricted)
    Other versions:
  8. 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. [Downloadable!] (restricted)
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  13. Harris, Milton & Raviv, Artur, 1991. " The Theory of Capital Structure," Journal of Finance, American Finance Association, vol. 46(1), pages 297-355, March. [Downloadable!] (restricted)
  14. Shyam-Sunder, Lakshmi, 1991. "The Stock Price Effect of Risky versus Safe Debt," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 26(04), pages 549-558, December. [Downloadable!]
  15. Mitchell, Mark L & Stafford, Erik, 2000. "Managerial Decisions and Long-Term Stock Price Performance," Journal of Business, University of Chicago Press, vol. 73(3), pages 287-329, July. [Downloadable!] (restricted)
    Other versions:
  16. Barber, Brad M. & Lyon, John D., 1997. "Detecting long-run abnormal stock returns: The empirical power and specification of test statistics," Journal of Financial Economics, Elsevier, vol. 43(3), pages 341-372, March. [Downloadable!] (restricted)
  17. Lee, Inmoo & Loughran, Tim, 1998. "Performance following convertible bond issuance," Journal of Corporate Finance, Elsevier, vol. 4(2), pages 185-207, June. [Downloadable!] (restricted)
  18. Robyn McLaughlin & Assem Safieddine & Gopala Vasudevan, 1998. "The Information Content of Corporate Offerings of Seasoned Securities: An Empirical Analysis," Financial Management, Financial Management Association, vol. 27(2), Summer.
  19. 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. [Downloadable!] (restricted)
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