Understanding Stock Price Behavior Around External Financing

Abstract

The negative association between pre-financing price run-ups and post-financing price drift-downs is well documented in the literature. We find that firms experiencing pre-financing run-ups and firms experiencing post-financing drift-downs may not always be the same firms. This reversal pattern is present for firms with low levels of cash flows only. This negative association does not exist for firms with high levels of cash flows. The firms with high levels of cash flows do not experience post-financing long-term underperformance even after controlling for various well-documented anomalies. Our analyses suggest that the level of cash flows plays a critical and previously unrecognized role in the net issuance puzzle.

Keywords: External financing, stock price run-ups, stock underperformance

JEL Classification: G32, G34