Mark Bayless

Is the performance of firms following seasoned equity issues anomalous

Abstract The hypothesis that negative abnormal returns following an equity issue are anomalous assumes the use of the correct benchmark. The alternative hypothesis assumes that an incorrect benchmark has been used or that benchmarks change following an issue. We evaluate these assumptions by examining the performance of SEO firms during periods when there was no issue activity. Results indicate that SEO firms experience positive abnormal returns away from the issue window and that positive performance is most pronounced for small SEO firms. These and other results are inconsistent with the alternative hypothesis.

The myth of executive compensation: do shareholders get what they pay for?

We use compensation data for a sample of 701 US public firms and document a significant positive relation between the level of executive compensation and the subsequent realized stock returns. In present value terms, shareholders in firms incurring a total compensation cost of

What motivates seasoned equity offerings? Evidence from the use of issue proceeds

78 million above the median experience subsequent incremental wealth gains of

Firm characteristics, market conditions, and the pattern of performance after seasoned equity offers

385 million above the median over the 5-year period following compensation awards. The results are robust to the use of size and industry-adjusted measures of compensation and returns, and hold after we segment the sample by firm size and industry. Our evidence is consistent with rational executive labour markets where more talented executives command higher compensation and produce superior returns.

Are seasoned equity offerings made in response to weak operating performance

Purpose - The purpose of this paper is to discover how firms use issue proceeds from seasoned equity offerings (SEOs). Design/methodology/approach - Utilizing a large sample of industrial corporations, the authors perform a series of regressions in which the dependent variable is one of six use categories and the independent variables are issue proceeds, other sources, and control variables. The impact of macroeconomic conditions on the use of issue proceeds is explicitly considered and the primary use is found to be investment in R&D. Findings - Some evidence is found that issue proceeds are funnelled into cash, capital expenditures, and acquisitions but these do not seem to be the primary use. While the results suggest a motive for issue that does not rely on behavioural theories, they also suggest that investment theories must reconcile the weak post-issue performance of SEO firms with the fact that, in general, R&D investment is associated with positive abnormal returns and operating performance. To that end the evidence is consistent with equity issues being made in reaction to exogenous reductions in required returns and during periods when growth opportunities are more plentiful. Originality/value - This is the first paper to explicitly consider the role of macroeconomic conditions in the use of proceeds from seasoned equity issues and to document that the primary use is investment in R&D. The results will help scholars better understand the motivation for SEOs and assist in evaluating explanations of the poor performance of issuers. The results also provide practitioners with valuable benchmarks of the use of issue proceeds, which they can use to evaluate equity as a source of external funding for their company.

An examination of the performance of SEOs using a comparison period approach6

This paper uses a characteristics-based approach to examine the pattern of abnormal returns after seasoned equity offerings. Unlike previous studies the risk class of issuers are allowed to change in each of a series of six-month holding periods and firms are classified into categories based on performance measures, the use of proceeds and market conditions at the time of issue. This methodology reveals that negative abnormal returns persist for only about 3.5 years on average following offers and are driven by the 37% of firms that reduce capital spending. These and other results suggest that post-issue abnormal returns vary in a way that is consistent with quasi-efficient capital markets.

Expectations of security type and the information content of debt and equity offers

This article examines the operating performance of firms surrounding Seasoned Equity Offerings (SEOs) and finds that weak operating performance by issuing firms begins during a 2-year period prior to issue. This is in contrast to the stylized facts that a seasoned equity issue initiates a period of weak performance. Our findings suggest instead that an issue is more likely a reaction to a period of weak performance that is already well under way. Consistent with previous studies, we find that weak performance continues after the issue despite the evidence of favourable macroeconomic conditions.

THE INFLUENCE OF PREDICTABILITY ON DIFFERENCES IN THE MARKET REACTION TO DEBT AND EQUITY ISSUE ANNOUNCEMENTS

Abstract We use an extension of Masulis’ (1980) comparison period approach to evaluate the performance of firms that issued seasoned equity from 1974 to 1992. Our methodology does not require that proxies provide unbiased estimates of expected returns so long as estimators are consistent across time periods. Results reveal that firms’ market-adjusted performance in periods when there was no issue activity is consistently superior to their performance following seasoned offers. This result is stable across ten half-year intervals following offerings and persists across portfolios based on size and book-to-market. However, relatively poor postissue performance is concentrated in high issue volume periods.