An Investigation of Stock Price Declines Following Corporate Financing Events: Further Evidence

51 Pages Posted: 2 May 2018

See all articles by Uday Chandra

Uday Chandra

SUNY University at Albany

Richard A. Schneible Jr.

State University of New York (SUNY) at Albany

Date Written: April 13, 2018

Abstract

Prior research documents a large downward drift in stock prices following issuances of debt and equity by U.S. firms. We conduct tests based on both stock price and trading volume to provide evidence on the reasons for this apparent market anomaly. We document evidence of earnings management through accruals prior to external financing and lower operating performance afterward that is associated with the amount of capital raised. The earnings management that precedes external financing and the amount of capital raised are associated with both the post-financing decline in stock price and trading volume around earnings announcements that follow for a period of three years. This evidence is consistent with the proposition that firms raise external capital prior to predictable declines in their operating performance and they release upward biased earnings before these events to manage investor expectations. The failure of many investors to incorporate this information into their trading decisions in a timely manner consistent with limited attention and over-confidence appears to drive stock mispricing. Our evidence does not support the conjecture that the financing anomaly is primarily a statistical artifact or that it is a manifestation of the accrual anomaly.

Keywords: financing anomaly, trading volume, earnings management, limited attention

JEL Classification: G12, G14, M41

Suggested Citation

Chandra, Uday and Schneible, Richard, An Investigation of Stock Price Declines Following Corporate Financing Events: Further Evidence (April 13, 2018). European Accounting Review Forthcoming. Available at SSRN: https://ssrn.com/abstract=3162441

Uday Chandra (Contact Author)

SUNY University at Albany ( email )

1400 Washington Avenue
Building, Room 109
Albany, NY 12222
United States
518-442-9092 (Phone)

Richard Schneible

State University of New York (SUNY) at Albany ( email )

Albany, NY 12222
United States

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