Idiosyncratic Risk and Long-Run Stock Performance Following Seasoned Equity Offerings

Abstract

Post-issue stock underperformance is driven, at least in part, by the contemporary decline in idiosyncratic risk (proxied by idiosyncratic volatility) exposure for seasoned equity offerings (SEO) firms. As young firms dominate the SEO market, they generally face higher uncertainty of mean profitability, which they resolve more quickly due to learning. Hence they experience a larger reduction in idiosyncratic risk than their size, book-to-market, and exchange matching firms suggests. Furthermore, post-issue abnormal change in idiosyncratic risk is positively associated with long-run stock abnormal return, an association driven mainly by young firms that experience significant abnormal declines in idiosyncratic risk.

Keywords: Idiosyncratic risk; Rational learning; Long-run performance; Seasoned equity offerings

JEL Classification: D83, G12, G32