Modelling and Simulation Society of Australia and New Zealand
Faculty of Business and Law
School of Accounting, Finance and Economics
We show that firms issuing seasoned equity possess unique risk characteristics as captured by beta. We use a benchmark to control for this risk and then measure the extent of risk-adjusted underperformance using a longer time-frame than the five-year period used in most studies. We examine the impact of various factors on post-issue performance as well as initial issue underpricing. Why do companies making seasoned equity offerings (SEOs) significantly under perform in the post-issue period? Loughran and Ritter (1997) suggested transitory over-pricing prior to issue, or agency and information costs, Healy and Palepu (1990) and Masulis and Korwar (1986). Rangan (1997) and Teoh, Welch and Wong (1997) suggested managerial price ramping. Are SEOs poor long-run performers? Masulis and Korwar (1986) documented significant underperformance of companies issuing new equity, subsequently confirmed by Asquith and Mullins (1986), Mikkleson and Partch (1986) and Schipper and Smith (1986). Loughran and Ritter (1995), extended Healy and Palepu (1990), Ritter (1991) and Loughran, Ritter and Rydqvist's (1994) work in the area of initial public offerings (IPOs), examining the performance of SEO firms. They observed 15.7% and 33.4% five-year holding period returns for IPOs and SEOs when the returns on non-issuing firms matched by capitalisation were 66.4% and 92.8%. Loughran and Ritter (1995) concluded "an investor would have had to invest 44 percent more money in the issuers than in non-issuers of the same size to have the same wealth five years after the offering date". Loughran and Ritter (1997) suggest possible "windows of opportunity", periods during which firms are significantly overvalued providing an opportunity to augment "financial slack", Allen and Soucik (1999) suggest the conclusion of long-run underperformance is dependent on the definition of the 'long-run'.