We investigate the “new equity puzzle” using an approach that allows us to analyze the structural change in both alpha and systematic risk after the event. Brav, Geczy, and Gompers (2000) and Eckbo, Masulis, and Nodi (2000) cast doubt on the validity of matched-firm adjusted returns as a measure of post-issue performance. Eckbo et al. (2000) argue that the drop in the leverage of SEO issuers reduces their risk level and may explain their lower post-issue returns compared to their matchers. Using a sample of 3,949 SEO issues between 1985 and 2005, we find that after taking into account the change in their risk profile, SEO firms still exhibit a clear post-issue underperformance over their matchers at short or long run and regardless the level of change in their leverage. Furthermore, we find that SEO firms with the largest decline in leverage, exhibit a larger performance drop over their matchers compared to firms with the largest increase in leverage. However, over the 1 and 3 years post-issue, these SEO firms with the largest decline in leverage, show a lower underperformance over their matchers compared to firms with the largest increase in leverage. On the longer run - over the 5-year period particularly - the picture reverses.

Purpose-This paper seeks to examine the potential for regulation to reduce information asymmetries between firm insiders and outside investors.Design/methodology/approach-Extensive prior research has established that there are substantial effects of information asymmetry in seasoned equity offers (SEOs). The paper tests for a mitigating effect of regulation on such information asymmetries by examining differences in long-run operating performance, changes in that performance, and announcement-period stock returns between unregulated industrial firms and regulated utilities that issue seasoned equity. The authors also segment the samples by firm size, since smaller firms are likely to have greater asymmetries.Findings-Consistent with regulated utility firms having lower levels of information asymmetry, they have superior changes in abnormal operating performance than industrial firms pre-to post-issue and their announcement period returns are significantly less negative. These findings are most pronounced for the smallest firms, firms likely to have the greatest information asymmetries and where regulation could have its greatest effect.Research limitations/implications-The paper does not examine costs of regulation. Thus, future research could seek to measure the cost/benefit trade-off of regulation in reducing information asymmetry. Also, future research could examine cross-sectional differences between different industries and regulated utilities.Practical implications-Regulation reduces information asymmetry. Thus, regulation or mandated disclosure may be appropriate in industries/markets where information asymmetry is severe.Originality/value-This paper is the first to compare the operating performance of regulated and unregulated SEO firms.

PurposeThis paper seeks to examine the potential for regulation to reduce information asymmetries between firm insiders and outside investors.Design/methodology/approachExtensive prior research has established that there are substantial effects of information asymmetry in seasoned equity offers (SEOs). The paper tests for a mitigating effect of regulation on such information asymmetries by examining differences in long‐run operating performance, changes in that performance, and announcement‐period stock returns between unregulated industrial firms and regulated utilities that issue seasoned equity. The authors also segment the samples by firm size, since smaller firms are likely to have greater asymmetries.FindingsConsistent with regulated utility firms having lower levels of information asymmetry, they have superior changes in abnormal operating performance than industrial firms pre‐ to post‐issue and their announcement period returns are significantly less negative. These findings are most pronounced for the smallest firms, firms likely to have the greatest information asymmetries and where regulation could have its greatest effect.Research limitations/implicationsThe paper does not examine costs of regulation. Thus, future research could seek to measure the cost/benefit trade‐off of regulation in reducing information asymmetry. Also, future research could examine cross‐sectional differences between different industries and regulated utilities.Practical implicationsRegulation reduces information asymmetry. Thus, regulation or mandated disclosure may be appropriate in industries/markets where information asymmetry is severe.Originality/valueThis paper is the first to compare the operating performance of regulated and unregulated SEO firms.

This study casts light on the impact of the decision to diversify globally on the firm’s operating performance. Examining operating performance enables us to circumvent the measurement errors associated with excess value that is used to measure the diversification discount/premium. Our central empirical results for a sample of firms that chose to diversify globally reveal that sample firms, in spite of exhibiting a diversification discount, significantly outperform their domestic counterparts following the diversification. Our findings imply that global diversification does not result in misallocation of investment resources. The fact that our firms exhibit the diversification discount and yet outperform their domestic counterparts confirms previous studies’ conclusions that the diversification discount is most likely an artifact of measurement error

We study the relation bem-een investment banker reputation and announcement-period returns and between banker reputation and three-year post-issue holding-period returns for firms that conducted seasoned equity offerings (SEOs) between 1980 and 1994. We find a positive relation overall between investment banker reputation and announcement-period returns but no significant relation between investment banker reputation and long-run post-issue stock price performance. We also design an empirical model to predict the prestige of the issuers underwriter. We find that announcement-period returns are significantly related to banker prestige for issuers vith high levels of information asymmetry that go against type to use a high-prestige investment banker.

We examine the long-run operating and stock price performance of 828 convertible debt issuers. Relative to matched, nonissuing firms, convertible debt issuers have small improvements in operating performance before the offer and significant declines in operating performance from pre- to post-issue. We examine the relation between several factors and operating performance. We find that for some pre- to post-issue periods, operating performance changes are positively related to firm leverage and the callability of the bond and negatively related to performance run-up before the offer, and investment in new assets. We also find some evidence that firms that issued equity in the three years before their convertible debt issue have larger declines in performance after the offer. Relative to matched, nonissuing firms, convertible debt issuers have superior stock-price performance before the offer and significantly poor performance after the issue.

This paper examines the information content of offerings of seasoned securities (equity and debt) by public corporations by analyzing the relationship between information asymmetry and long-run changes in firm operating performance around the offerings. Both debt and equity issuers have post-issue declines in operating performance, both on an unadjusted basis and when compared to control groups based on firm size and operating performance. Among equity issuers, firms with greater information asymmetry have larger post-issue performance declines. The difference is smaller for debt issuers. We find that these results hold even after controlling for other variables which can affect operating performance, such as free cash flow, performance run up, and investment in property, plant, and equipment. Our results are consistent with information models of the decision to issue securities, such as Myers and Majluf (1984).

The determinants of equity duration, or interest rate sensitivity, have proven difficult to identify in empirical studies. The authors argue in this article that because growth opportunities exhibit option-like characteristics, stocks of high-growth companies are likely to react differently to changes in interest rates from stocks of low-growth companies. They test this hypothesis using two broadly based portfolios and find that their high-growth portfolio exhibits significantly different interest rate sensitivity fi om their low-growth portfolio. In fact, holding market exposure constant, their high-growth portfolio's returns react positively to an increase in interest rates, on average, in contrast to the negative reaction of their low-growth portfolio's returns.

It is well documented that, on average, when an industrial firm announces a seasoned equity offering (SEO), its stock price falls. Several of the hypotheses that have been advanced to explain this phenomenon predict a decline in operating performance subsequent to the SEO. We examine changes in operating performance for a large sample of firms that conducted SEOs from 1980 to 1991 and find that these firms experienced a sharp, statistically significant decrease in profitability following the SEO. This decrease shows up in both industry-adjusted and unadjusted comparisons.Overall, our results show that the announcement of an SEO conveys negative information about the future operating performance of a firm. Thus, issuing firms should be prepared for a fall in stock price and expectations of future firm operating performance should be reevaluated in the light of an SEO announcement. Managers of issuing firms should make every effort to convey positive information, as for example the planned use of proceeds, to counteract the effect of the announcement.The results of our analysis of the determinants of the performance drop are generally consistent with the models of Myers and Majluf (1984) and Jensen (1986). Jensen argues that there are important divergences of interest between managers and shareholders. Such divergences might induce managers to issue equity and waste funds by taking up negative-net-present-value projects. In the Myers and Majluf model, managers have private information about the firm and, acting on behalf of existing shareholders, prefer to issue equity when their shares are overpriced. They avoid issuing stock when they believe that it is undervalued. Consistent with these models, we find that operating performance is relatively better among SEO firms that have less free cash flow, that have a lower run-up in operating performance prior to the offering, and invest in new fixed assets.Issuing firms exhibit significant gains in performance immediately prior to the SEO and perform above their industry average prior to the SEO. However, the decline in performance during the three-year period following the issue is much larger than the pre-issue increase. It is long-term and appears to be permanent on an industry-adjusted basis. Our results do not support the argument that all firms with large amounts of free cash flow are overpriced and have a greater tendency to issue equity.We also find that leverage, growth opportunities, and firm size are important factors in the decision to issue equity. Firms with higher leverage have a greater tendency to issue equity. This is consistent with the view that firms with high leverage try to avoid increasing the costs of financial distress. Firms with higher growth opportunities have a greater need for funds and issue equity to meet their investment needs. Among high-growth firms, smaller firms have a greater tendency to issue equity. Among low-growth firms, larger firms have a greater tendency to issue equity.

on British Studies (NACBS).It was the result of the imaginative generosity of a Trinity College alumnus, Frederick E. Hasler

When a new project proposal calls for the use of existing, but currently idle, facilities, an opportunity cost should be charged to the new project for using those facilities. Capacity in place gives the firm an option to produce. When capacity is not available, the firm has an option to invest. The true opportunity cost of using the excess capacity is the change in the value of the firm's options that is caused by diverting capacity to some other purpose. Techniques exist for estimating this cost, but we argue that they ignore the option elements of the problem. We show that the true opportunity cost can vary widely in different circumstances and that existing measurement techniques err primarily by focusing oil the cost of specific investment programs rather than on the value of a firm's production and investment options.