Investor Base, Cost of Capital, and Firm Performance: The Case of Post-Issuance Anomalies

Abstract

We examine the link between a firm’s investor base, discount rate, capital budgeting decisions, and profitability. We argue that a downward shift in discount rates associated with an expanded investor base can account for both poor stock returns and operating performance following security offerings. Our most striking result is that an expansion in the firm’s investor base is both a necessary and sufficient condition for anomalous poor performance. That is, issuing firms that do not experience a change in investor base do not exhibit anomalous post issuance performance while non-issuing firms matched on changes in investor base exhibit identical performance to that of issuing firms. More generally, our evidence suggests that the investor base plays an important role in corporate finance.

Keywords: Post-Issuance Anomalies, Seasoned Equity Offerings, Time-Varying Discount Rates, Investor Base, Corporate Investment Policy

JEL Classification: D92, G31, G32