Long-Horizon Abnormal Performance after Seos Revisited: An Asset Allocation Perspective

Abstract

We re-visit the long-horizon underperformance following seasoned equity offerings (SEOs) from an asset allocation perspective. We focus on the economic value, to a mean-variance investor, of investing in a SEO portfolio relative to a set of benchmark portfolios. As a result, we are able to avoid some of the difficulties associated with statistical inference in traditional long-horizon event study methods. Our main results are as follows. Using UK data on SEOs from 1989-1997, we find that, for a mean-variance investor, investing in a SEO portfolio does not lead to a statistically or economically significant enlargement in the investment opportunity set relative to a set of benchmark portfolios. Our results do not change when we relax the assumption of normality of the returns and use GMM-based tests. Second, in contrast to results using event-time and calendar-time abnormal returns, we find no evidence of abnormal performance of the SEO portfolios relative to a set of characteristic based benchmark portfolios using mean-variance intersection tests. Finally, we find similar results even when we allow for time-varying expected returns by incorporating conditioning information. Overall we find that, from an asset allocation perspective, the extent of long-horizon underperformance after SEOs may be overstated.

Keywords: Long-Horizon Abnormal Performance, Seasoned Equity Offerings, Mean-Variance Spanning and Intersection, Asset Allocation, Stochastic Discount Factor

JEL Classification: G12, G14, G30