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Misreaction

Published online by Cambridge University Press:  06 April 2009

C. N. V. Krishnan  and
Paul A. Laux
C. N. V. Krishnan
Affiliation:
[email protected], 363 Peter B. Lewis Building, Weatherhead School of Management, Case Western Reserve University, 10900 Euclid Ave., Cleveland, OH 44106
Paul A. Laux
Affiliation:
[email protected], Alfred Lerner College of Business and Economics, University of Delaware, Newark, DE 19711.
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Abstract

To learn about investors' information processing, we examine the issuances of trust preferred stock, a leverage-neutral hybrid security. Specific benefits of trust preferred stock issuance have become focal points for issuers. These focal benefits include tax and financial distress avoidance, for example. We find these benefits are associated with short-run stock price misreactions. For those issuers that do not have a focal issuance benefit, mean short-run abnormal returns tend to be negative but long-run abnormal returns tend to be positive. Unanticipated changes in long-run profit opportunities, not short-run operating profits, appear to be the key to the misreaction.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 40 , Issue 2 , June 2005 , pp. 403 - 434
Copyright
Copyright © School of Business Administration, University of Washington 2005

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