Does Market Misvaluation Help Explain Share Market Long-Run Underperformance Following a Seasoned Equity Issue?

29 Pages Posted: 12 Jun 2006

See all articles by Philip R. Brown

Philip R. Brown

UWA Business School, M250; Financial Research Network (FIRN)

Gerry Gallery

Queensland University of Technology

Olivia Goei

affiliation not provided to SSRN

Abstract

We examine the relation between pre-seasoned equity offering (SEO) announcement date misvaluation and long-run post-SEO performance for a large sample of Australian SEOs made between 1993 and 2001. Our study is motivated by inconsistent findings across countries with respect to the SEO long-run underperformance anomaly first documented in the USA, inconclusive findings with respect to the hypothesis that managers exploit market misvaluation when timing equity issues, and a recent Australian Stock Exchange proposal to loosen SEO regulation. We find SEO firms underperform common share market benchmarks for up to 5years after the announcement. Using a residual income valuation method, we show that this underperformance is related to pre-announcement date misvaluation. An unexpected result is that underperformance and misvaluation are more severe for private placements than rights issues. Institutional factors unique to the Australian setting, particularly the large number of smaller loss-making firms among private placement issuers, appear to explain the poorer performance of placement firms. Our results are robust to various measurement methods and assumptions, and demonstrate the importance of researching SEO performance in alternative institutional settings.

Suggested Citation

Brown, Philip R. and Gallery, Gerry Thomas and Goei, Olivia, Does Market Misvaluation Help Explain Share Market Long-Run Underperformance Following a Seasoned Equity Issue?. Accounting and Finance, Vol. 46, No. 2, pp. 191-219, June 2006. Available at SSRN: https://ssrn.com/abstract=906899 or http://dx.doi.org/10.1111/j.1467-629X.2006.00172.x

Philip R. Brown (Contact Author)

UWA Business School, M250 ( email )

Crawley, Western Australia 6009
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Gerry Thomas Gallery

Queensland University of Technology ( email )

School of Accountancy GPO 2434
Brisbane QLD 4001
Australia
61738648347 (Phone)

Olivia Goei

affiliation not provided to SSRN

No Address Available

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