Stock Returns and Operating Performance of Securities Issuers

Abstract

We examine long-run stock returns and operating performance around firms' offerings of common stock, convertible debt, and straight debt over 1985 to 1990. We find that pre-issue abnormal returns are positive and significant for stock issuers, but not for convertible and straight debt issuers. The post-issue mean returns show that common stock and convertible debt issuers experience underperformance during the post-issue periods, but straight debt issuers do not. Consistent with these results, common stock issuers experience the best pre-issue operating performance among all three types of issuers, and operating performance declines during the post-issue periods for common stock and convertible debt issuers. Using a new approach in linear model estimations to correct heteroskedasticity and to adjust for finite sample, we find a positive relation between post-issue operating performance and issue-period stock price reactions. The results suggest that future operating performance is anticipated at the issue and that securities issues provide information on issuers' future performance.

JEL Classification: G14, G32