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Is the Market Surprised by Poor Earnings Realizations following Seasoned Equity Offerings?

Published online by Cambridge University Press:  06 April 2009

David J. Denis  and
Atulya Sarin
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Abstract

We examine the stock price reaction to earnings announcements in the five years following seasoned equity offerings (SEOs). On average, post-SEO earnings announcements are met with a significantly negative abnormal stock price reaction. Although this negative reaction accounts for a disproportionately large portion of long-run post-SEO abnormal stock returns, on average, abnormal stock price reactions to post-seo earnings announcements are reliably negative only within the smallest quartile of equity issuers. For small firms, therefore, these findings are broadly consistent with the hypothesis that firms issue equity when the market overestimates the firm's future earnings perfomance.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 36 , Issue 2 , June 2001 , pp. 169 - 193
Copyright
Copyright © School of Business Administration, University of Washington 2001

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Footnotes

*

Karnnert Graduate School of Management, Purdue University, West Lafayette, IN 47907, and Leavey College of Business and Administration, Santa Clara University, Santa Clara, CA 95053, Respectively. We are grateful for helpful comments received from Brad Barber, Diane Denis, Greg Kadlec, Jonathan Karpoff (the editor), David Lesmond, Tim Loughran, Raghu Fau, Jay Ritter, Sunil Wahall, Susan Watts, an Anonymous Referee, and Seminar Participants at Indiana University, Tulane University, and the University of Missouri.

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