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Is the Market Optimistic about the Future Earnings of Seasoned Equity Offering Firms?

Published online by Cambridge University Press:  06 April 2009

Peter A. Brous ,
Vinay Datar  and
Omseh Kini
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Abstract

The leading explanation for the post-issue long-run stock return underperformace of seasoned equity offering firms is that investors have optimistic expectations regarding future earnings and the underperformance occures as these expectations are corrected over time. To directly test this hypothessis, we examine investors' reaction to quarterly earnings announcements over a five-year period following the offering for a large sample of seasoned equity issuing firms. In general, our evidence suggests that investorsare not disappointed by earnings announcements that follow seasoned equity offerings. This result is not sensitive to widening the windown over which earnings announcement returns are computed. This result also holds true for subsets of equity issuing firms. The choice fo these three subsets is predicated by extant evidence that these firms are likely to convey relatively more unfavorable information throung their earnings announcements. Overall, our findings are inconsistent with the optimistic expectations hypotgesis.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 36 , Issue 2 , June 2001 , pp. 141 - 168
Copyright
Copyright © School of Business Administration, University of Washington 2001

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Footnotes

*

Brous and Datar, Albers School of Business, Seattle University, Seatle, WA 98122; Kini, Robinson College of Business, Georgia state University, Atlanta, GA 30303. This paper has benifited from comments by seminar participents at the 1998 American Finance Association Meetings, and in workshops at Arizona State University, University of Oregon, and University of Washington. We espwcially acknowledge comments by Christopher Geczy, Jarrad Harford, Jonathan Karpoff (the editor), Wayne Mikkelson, Jim Owers, Ken Shah, Katherine Spiess (referee), and Ivo Welch (associate editor and referee). We thank Bing Xuan Lin and Yongduk Pak for excellent research assitance.

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