بازده قابل توجه تاریخ انتشار اوراق در عرضه سهام فصلی: قطعنامه بر اساس گزینه های یک پازل

The significant negative issuance day returns associated with seasoned equity offerings (SEOs) have been a puzzle. In this paper we provide two explanations for this empirical regularity. First, using an option-based argument, we contend that issuance day returns are negative because of SEO related declines in volatility that reduce the option value of equity. Our empirical examination of US SEOs between 1983 and 2003 strongly supports this contention. Second, we find that the negative issuance date return is also related to market liquidity around the issuance date. Our findings are robust to various sub-samples and the uncertainty resolution argument, and are not driven by SEO buy–sell order imbalances.

While there is evidence that both Initial Public Offerings (IPOs) and Seasoned equity offerings (SEOs) are accompanied by significant market movements upon issuance and are followed by negative abnormal performance in the long-term (as perhaps they reveal adverse selection and stock issuance by overpriced firms), SEOs seem much more important. Over the period 1980–2003, there were many more SEOs than IPOs in the US and SEOs raised about 50% more capital than IPOs over the same period (Eckbo, Masulis, & Norli, in press). Thus, it is important to understand the price, valuation, and trading dynamics associated with SEOs. Nevertheless, while there are numerous studies of SEOs, some aspects of the equity returns associated with SEOs are still difficult to understand. Earlier studies have documented a negative market return on the actual issuance date of seasoned equity offerings (SEO) in addition to the negative returns on the announcement date.2 The conventional explanation for the negative return on the announcement is that the decision to issue additional equity reveals to the market that the firm's equity has been overpriced (e.g., Mikkelson and Partch, 1986 and Ritter, 2003). However, most of the theoretical models based on asymmetric information (e.g., Lucas and McDonald, 1990 and Carlson et al., 2006) do not differentiate between the announcement effect and issuance effect on returns. It is not clear from the existing literature whether the announcement effect and issuance effect are driven by different forces. In particular, if the negative information associated with equity issuance has been conveyed by the announcement, why would stock price fall further on the issuance date? Prior studies have provided some explanations for this issuance effect puzzle. For example, Korajczyk, Lucas, and McDonald (1991), and Mikkelson and Partch (1988) argue that the drop in stock price on the issuance date is related to additional information conveyed by the actual issuance, because not all announced SEOs are followed through when an issuance was announced. The actual SEO issue removes the uncertainty around the announcement. Lease, Masulis, and Page (1991) argue that the price drop at SEO issue is instead induced by the imbalance in the buy–sell order flow: many buy orders are sent to the primary market, while the sell orders continue to be routed to the secondary market, leading to negative returns on the issuance date. In this paper we assess these prior contentions regarding the issuance date impact of SEOs and provide two alternative explanations for this empirical regularity, an option-based explanation and a liquidity-based explanation. First, as Merton (1977) points out, equity can be considered options of a firm. If the firm is liquidated and its asset value is above the value of debt, the equity holders get the difference between the asset value and debt; if the asset value falls below the amount of debt outstanding, then equity holders get zero payoffs. So holding equity in a firm is similar to holding a call option on the value of the firm with the amount of debt outstanding as the strike price. An important parameter affecting option values is the underlying volatility. A recent stream of literature argues that asset returns are affected by corporate investment opportunities (e.g., Lucas and McDonald, 1990, Berk et al., 1999, Kogan, 2004, Carlson et al., 2004 and Cooper, 2006). Carlson, Fisher, and Giammarino (2006) applies this literature to the case of SEOs. They argue that when firms finance new investments via SEOs, growth opportunities are replaced by less risky assets-in-place. Using this framework, Carlson, Fisher, Giammarino theoretically predict long-run underperformance post-SEOs. However, their model does not specifically address the issuance effect. In other words, it is not clear whether the issuance effect is driven by the release of new information (which drives the announcement effect in their model), or a reduction in risk (which they argue drives the long-run performance post-SEOs).3 Second, issuance of additional equity exerts selling pressure on the market. It is possible that supply outweighs demand around the issuance date, and this temporary supply–demand imbalance negatively affects stock prices. Following this logic, larger issuance size and lower market liquidity leads to more negative issuance returns. This argument follows from a recent stream of literature documenting that trading affects asset returns (e.g., Lesmond, Schill, & Zhou, 2004). We empirically examine these two explanations using a sample of 2166 SEO firms from the period 1983–2003. We find that the negative market return on the issuance date is positively related to the change in volatility around SEO issuance, consistent with the option-based argument. Further, issuance date returns are negatively related to offer size and positively related to market liquidity around the issuance date. Extensive robustness checks confirm that our conclusions hold among various subgroups and after adjusting for issuance uncertainty. Further, our findings are not driven by the buy–sell order imbalance associated with SEOs that had been documented in prior literature. In contrast, we find that neither the option-based argument nor the liquidity argument can explain the market response on the announcement date. Our results suggest that the significant negative market returns around SEO issuance are related to the changes in firm fundamentals and the temporary market pressure. The rest of the paper proceeds as follows. The second section describes the sample, and the third section presents empirical results. A brief conclusion is drawn in the final section.

The negative issuance day returns associated with SEOs have been a puzzle. In this paper we provide two explanations to resolve this puzzle. We contend that the issuance day returns may be negative because SEO issuance reduces the option value of equity by reducing volatility. Second, we argue that the additional shares on the market may exert selling pressure on the market, leading to negative returns on the issuance date. An empirical examination of SEOs between 1983 and 2003 strongly supports these explanations. We find that SEO issuance date returns are positively related to the accompanying drop in volatility. Further, the issuance effect is negatively related to offer size and positively related to turnover around the issuance date. These findings are quite robust among various sub-samples and not driven by issuance uncertainty or by order imbalance. In contrast, we find a lack of association between these factors and SEO announcement returns suggesting that announcement returns are not to be driven by a change in firm fundamentals and liquidity. These results should be of much interest to managers, investment bankers, and policy makers.