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Abstract:
We document that firms making straight and convertible debt offerings during 1975-1989 substantially underperformed samples of non-issuing control firms matched on size and book-to-market ratio. This evidence of long-run underperformance following debt offerings is not consistent with the management timing hypothesis, since managers would sell equity, rather than debt, if they could anticipate post-issue underperformance. Instead, our results support the Miller and Rock (1985) theory that all security issues convey negative information to stockholders. As with equity offerings and repurchases, the market appears to underreact at the time of the debt offering announcement so that the full impact of the offering is realized over a longer time horizon.

Abstract:
This study examines transactions in stocks during the thirty trading days prior to earnings announcements. Using two methodologies, we find evidence of informed trading for initiators of large transactions (presumably institutions) but not for initiators of small transactions (presumably individuals). Specifically, we find that, relative to a control period, initiators of large transactions tend to buy (sell) stocks prior to earnings announcements that exceed (fall short of) analyst forecasts. In addition, the fraction of total stock price movement that occurs on large transactions is substantially higher during the pre-announcement period than during the control period. Results of both tests suggest, contrary to previous research, that some large traders have and use superior private information prior to large earnings surprises.

Abstract:
We examine the long-run performance of the common stock of firms following calls of both straight and convertible debt from 1945 to 1995. Using a sample of 718 calls of straight debt, we find an average abnormal return in the five years following the call of between 0.16% and 0.34% per month, which compounds to an economically and statistically significant 11% to 22% over the five-year period. This evidence of overperformance following calls shows a distinct symmetry between the straight debt and equity markets. Issues of debt and equity are both followed by long-term underperformance, whereas stock repurchases and debt calls are both followed by long-run over-performance. For our sample of 713 calls of convertible debt, we find little systematic evidence of abnormal performance following the call. Some researchers suggest that calls of convertible debt provide negative signals to the market. Our results provide no support for this claim. In contrast, our evidence of marginal positive long-run returns provides weak support for the model that calls of convertible debt signal the realization of profitable investment options, and for the price pressure hypothesis.

Abstract:
We document that firms making seasoned equity offerings during 1975-1989 substantially under-performed a sample of matching firms from the same industry and of similar size that did not issue equity. Specifically, returns in the five-year period following a seasoned equity offering are, on average, 31.2 percent lower than those of non-issuing matched firms. This long-run underperformance persists even after controlling for trading system, firm book-to-market ratio, firm size, and firm age. It is similar to that previously documented for initial public offerings, implying that managers may be able to take advantage of overvaluation in both the initial and seasoned equity offerings markets.

Abstract:
We investigate the relation between earnings predictability, information asymmetry and the behavior of the adverse selection cost component of the bid-ask spread around quarterly earnings announcements for NASDAQ firms. While we find an increase in the adverse selection component of the bid-ask spread on the day of and the day prior to quarterly earnings announcements for firms with less predictable earnings, we find no evidence of such changes for firms with more predictable earnings. During a non-announcement period, we find that firms with relatively less predictable earnings have consistently higher total bid-ask spreads than firms with more predictable earnings. This finding suggests that firms with relatively less predictable earnings have a higher cost of equity capital than comparable firms with more predictable earning streams, ceteris paribus. Hence, earnings predictability may be a legitimate concern of managers who wish to minimize their cost of equity capital at least as it pertains to bid-ask spreads.

earnings predictability, bid-ask spreads, cost of capital

Abstract:
This study examines the association between earnings predictability and the behavior of the bid-ask spread (transaction costs), the adverse selection cost component of the spread, and trading volume around quarterly earnings announcements. We also consider the impact of earnings volatility and frequency of accounting changes on our earnings predictability measure. Consistent with the theoretical work in the literature (e.g., Glosten and Harris (1988)), we argue that more noisy (less predictable) earnings signals aggravate the information asymmetries between privately informed investors and market-makers in the capital markets. To compensate for this informational disadvantage, the market-makers' increase in the bid-ask spread at the time of an earnings announcement is expected to be more pronounced for firms with less predictable earnings.Consistent with our differential earnings predictability argument, we find an increase in the adverse selection component of the bid-ask spread on the day of and the day prior to the earnings announcement date for firms with less predictable earnings. In contrast, we find no evidence of a significant change in the adverse selection component of the bid-ask spread around quarterly earnings announcements of firms with highly predictable earnings. Consistent with earlier studies, we find significant increases in trading volume around earnings announcements. Ceteris paribus, this higher volume should lead to lower spreads. The increase in spreads we document therefore suggest that the increased volume is not sufficient to offset the increase in the adverse selection cost faced by market-makers. Our results suggest that the predictability of the earnings signal affects transactions costs and may impact the firm's cost of capital, a matter of interest to corporate managers and shareholders.