Can the Stock Market Anticipate Future Operating Performance? Evidence from Equity Rights Issues

47 Pages Posted: 18 Jan 2003

See all articles by Rezaul Kabir

Rezaul Kabir

University of Twente - Department of Finance and Accounting

Peter Roosenboom

Rotterdam School of Management, Erasmus University; Erasmus Research Institute of Management (ERIM)

Date Written: November 2002, 11

Abstract

This paper examines whether the stock market valuation impact is consistent with subsequent operating performance of firms. We use data for equity rights offerings - the widely adopted flotation method in the Netherlands. We first examine the stock market announcement effect of rights issues and observe that a statistically significant stock price decline takes place when companies announce rights issues. Further stock price decline is also observed during the subscription period. We then analyze post-rights issue operating performance of firms and find that, consistent with the announcement period decline in stock price, rights issuing firms subsequently exhibit a statistically significant decline in their operating performance. Additional investigation of both stock and operating performance decline provides full support for the information asymmetry hypothesis, partial support for the free cash flow hypothesis but no support for the window of opportunity hypothesis.

Keywords: equity offerings, rights issues, valuation effect, firm performance

JEL Classification: M, M41, G3, G32, G14

Suggested Citation

Kabir, Rezaul and Roosenboom, Peter, Can the Stock Market Anticipate Future Operating Performance? Evidence from Equity Rights Issues (November 2002, 11). ERIM Report Series Reference No. ERS-2002-102-F&A. Available at SSRN: https://ssrn.com/abstract=371049

Rezaul Kabir (Contact Author)

University of Twente - Department of Finance and Accounting ( email )

Faculty of Behavioral, Management & Social Science
P. O. Box 217
Enschede, 7500 AE
Netherlands
+31 53 489 4512 (Phone)
+31 53 489 2159 (Fax)

HOME PAGE: http://https://people.utwente.nl/r.kabir

Peter Roosenboom

Rotterdam School of Management, Erasmus University ( email )

P.O. Box 1738
Room T09-56
3000 DR Rotterdam
Netherlands
+31 10 40 82255 (Phone)

Erasmus Research Institute of Management (ERIM) ( email )

P.O. Box 1738
3000 DR Rotterdam
Netherlands

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