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Can the Stock Market anticipate Future Operating Performance? Evidence from Equity Rights Issues

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  • Kabir, M.R.
  • Roosenboom, P.G.J.

    (Tilburg University, Center for Economic Research)

Abstract

This paper examines whether the stock market valuation impact of rights issues is consistent with subsequent operating performance of issuing firms. Analysing a sample of rights issues in the Netherlands, we find that a significant stock price decline takes place with the announcement of rights issues. We then analyse post-rights issue operating performance and find that, consistent with the decline in stock price during the announcement period, issuing firms also exhibit a significant decline in their operating performance. Our analysis thus demonstrates that the stock market can successfully anticipate future changes in operating performance of firms.

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Bibliographic Info

Paper provided by Tilburg University, Center for Economic Research in its series Discussion Paper with number 2000-22.

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Date of creation: 2000
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Handle: RePEc:dgr:kubcen:200022

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  1. Jensen, Michael C, 1986. "Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers," American Economic Review, American Economic Association, vol. 76(2), pages 323-29, May.
  2. Kang, Jun-Koo & Kim, Yong-Cheol & Stulz, Rene M, 1999. "The Underreaction Hypothesis and the New Issue Puzzle: Evidence from Japan," Review of Financial Studies, Society for Financial Studies, vol. 12(3), pages 519-34.
  3. Kang, Jun-Koo & Stulz, Rene M, 1996. "How Different Is Japanese Corporate Finance? An Investigation of the Information Content of New Security Issues," Review of Financial Studies, Society for Financial Studies, vol. 9(1), pages 109-39.
  4. Ambarish, Ramasastry & John, Kose & Williams, Joseph, 1987. " Efficient Signalling with Dividends and Investments," Journal of Finance, American Finance Association, vol. 42(2), pages 321-43, June.
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  7. Jong, A. de & Veld, C.H., 1998. "An Empirical Analysis of Incremental Capital Structure Decisions Under Managerial Entrenchment," Discussion Paper 1998-83, Tilburg University, Center for Economic Research.
  8. Seth Armitage, 2000. "The direct costs of UK rights issues and open offers," European Financial Management, European Financial Management Association, vol. 6(1), pages 57-68.
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  10. 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.
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  16. Jung, Kooyul & Yong-Cheol, Kim & Stulz, Rene M., 1996. "Timing, investment opportunities, managerial discretion, and the security issue decision," Journal of Financial Economics, Elsevier, vol. 42(2), pages 159-185, October.
  17. 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.
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  19. Mario Levis, 1995. "Seasoned equity offerings and the short- and long-run performance of initial public offerings in the UK," European Financial Management, European Financial Management Association, vol. 1(2), pages 125-146.
  20. Kothare, Meeta, 1997. "The effects of equity issues on ownership structure and stock liquidity: A comparison of rights and public offerings," Journal of Financial Economics, Elsevier, vol. 43(1), pages 131-148, January.
  21. 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.
  22. B[oslash]hren, [Oslash]yvind & Eckbo, B. Espen & Michalsen, Dag, 1997. "Why underwrite rights offerings? Some new evidence," Journal of Financial Economics, Elsevier, vol. 46(2), pages 223-261, November.
  23. Nickolaos V. Tsangarakis, 1996. "Shareholder Wealth Effects of Equity Issues in Emerging Markets: Evidence from Rights Offerings in Greece," Financial Management, Financial Management Association, vol. 25(3), Fall.
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Cited by:
  1. Kabir, Rezaul, 2003. "Corporate Financing in The Netherlands: Some Empirical Evidence," EIFC - Technology and Finance Working Papers 32, United Nations University, Institute for New Technologies.
  2. Andrikopoulos, Panagiotis, 2009. "Seasoned equity offerings, operating performance and overconfidence: Evidence from the UK," Journal of Economics and Business, Elsevier, vol. 61(3), pages 189-215.

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