Long Term Performance around Public Bond Issues

Abstract:     
For the period 1971-1991, we find that firms issue bonds when a significant long-term upturn in performance levels off. The performance is significantly above normal for the five-year pre-issuance period but quickly falls to normal in the issuance year and remains so for the next five years. This is quite a different picture of performance than prior studies suggest. Besides a shorter observation period in the previous studies, we suggest that this difference is due to rebalancing bias in prior studies. Cross-sectional tests show a positive relationship between bond risk and pre-period abnormal performance, consistent with the adverse-selection model of financing decisions. However, our results also suggest that issuers realize significant pre-period abnormal performance, after accounting for bond risk.

JEL Classification: G32, G30

working papers series