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

46 Pages Posted: 17 Mar 2012

See all articles by Roger M. Edelen

Roger M. Edelen

Virginia Tech

Ozgur Ince

University of South Carolina - Moore School of Business

Gregory B. Kadlec

Virginia Polytechnic Institute & State University - Pamplin College of Business

Date Written: February 17, 2012

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

Suggested Citation

Edelen, Roger M. and Ince, Ozgur S. and Kadlec, Gregory B., Investor Base, Cost of Capital, and Firm Performance: The Case of Post-Issuance Anomalies (February 17, 2012). AFA 2013 San Diego Meetings Paper. Available at SSRN: https://ssrn.com/abstract=2023649 or http://dx.doi.org/10.2139/ssrn.2023649

Roger M. Edelen

Virginia Tech ( email )

1016 Pamplin Hall (0221)
Blacksburg, VA 24060-0221
United States

Ozgur S. Ince (Contact Author)

University of South Carolina - Moore School of Business ( email )

1014 Greene Street
Columbia, SC 29208
United States
(803) 777-4905 (Phone)

Gregory B. Kadlec

Virginia Polytechnic Institute & State University - Pamplin College of Business ( email )

1016 Pamplin Hall
Blacksburg, VA 24061
United States
540-231-4316 (Phone)

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