Robyn McLaughlin

The Operating Performance of Seasoned Equity Issuers: Free Cash Flow and Post-Issue Performance

We examine changes in operating performance for a large sample of industrial firms conducting seasoned equity offerings (SEOs). Our sample of SEO firms has significant improvements in operating performance prior to the issue. The SEO firms experience a sharp, statistically significant decrease in profitability following the SEO in both industry-adjusted and unadjusted comparisons. We find that the decline in profitability is greater for firms that have higher free cash flow, and that SEO firms that invest in new fixed assets perform better than SEO firms that do not.

Investment Banker Reputation and the Performance of Seasoned Equity Issues

We study the relation between investment banker reputation and announcement-period returns and between banker reputation and three-year post-issue holding-period returns for firms that conducted seasoned equity offerings (SEOs) between 1980 and 1994. We find a positive relation overall between investment banker reputation and announcement-period returns but no significant relation between investment banker reputation and long-run post-issue stock price performance. We also design an empirical model to predict the prestige of the issuer’s underwriter. We find that announcement-period returns are significantly related to banker prestige for issuers with high levels of information asymmetry that go against type to use a high-prestige investment banker.

Regulation and the Market for Corporate Control: Hostile Tender Offers for Electric and Gas Utilities

We document that regulation significantly constrains takeover activity. Of the twenty-one hostile offers for utilities between 1960 and 1990, only one was successful. In spite of this low rate of completion, announcement period returns to target utilities are positive and significant, although substantially smaller than average returns to nonregulated targets. We examine post-offer events and find that control-market effects are not entirely eliminated. One-third of hostile offers are followed by additional bids, control changes and/or divestitures. The regulatory and political environment changed during the period of this study and the frequency of hostile offers increased. Utility regulation, however, remains a substantial impediment to the completion of hostile takeovers.

The Opportunity Cost of Using Excess Capacity

When a new project proposal calls for the use of existing, but currently idle, facilities, an opportunity cost should be charged to the new project for using those facilities. Capacity in place gives the firm an option to produce. When capacity is not available, the firm has an option to invest. The true opportunity cost of using the excess capacity is the change in the value of the firms options that is caused by diverting capacity to some other purpose. Techniques exist for estimating this cost, but we argue that they ignore the option elements of the problem. We show that the true opportunity cost can vary widely in different circumstances and that existing measurement techniques err primarily by focusing oil the cost of specific investment programs rather than on the value of a firms production and investment options.

Regulation and information asymmetry: Evidence from the performance of industrial and utility firms issuing seasoned equity in the USA

Purpose - This paper seeks to examine the potential for regulation to reduce information asymmetries between firm insiders and outside investors. Design/methodology/approach - Extensive prior research has established that there are substantial effects of information asymmetry in seasoned equity offers (SEOs). The paper tests for a mitigating effect of regulation on such information asymmetries by examining differences in long-run operating performance, changes in that performance, and announcement-period stock returns between unregulated industrial firms and regulated utilities that issue seasoned equity. The authors also segment the samples by firm size, since smaller firms are likely to have greater asymmetries. Findings - Consistent with regulated utility firms having lower levels of information asymmetry, they have superior changes in abnormal operating performance than industrial firms pre- to post-issue and their announcement period returns are significantly less negative. These findings are most pronounced for the smallest firms, firms likely to have the greatest information asymmetries and where regulation could have its greatest effect. Research limitations/implications - The paper does not examine costs of regulation. Thus, future research could seek to measure the cost/benefit trade-off of regulation in reducing information asymmetry. Also, future research could examine cross-sectional differences between different industries and regulated utilities. Practical implications - Regulation reduces information asymmetry. Thus, regulation or mandated disclosure may be appropriate in industries/markets where information asymmetry is severe. Originality/value - This paper is the first to compare the operating performance of regulated and unregulated SEO firms.

Does Changing Leverage Cause Miss-Specification of Long-Run Return Measures in Seasoned Equity Offerings?

We investigate the “new equity puzzle” using an approach that allows us to analyze the structural change in both alpha and systematic risk after the event. Brav, Geczy, and Gompers (2000) and Eckbo, Masulis, and Nodi (2000) cast doubt on the validity of matched-firm adjusted returns as a measure of post-issue performance. Eckbo et al. (2000) argue that the drop in the leverage of SEO issuers reduces their risk level and may explain their lower post-issue returns compared to their matchers. Using a sample of 3,949 SEO issues between 1985 and 2005, we find that after taking into account the change in their risk profile, SEO firms still exhibit a clear post-issue underperformance over their matchers at short or long run and regardless the level of change in their leverage. Furthermore, we find that SEO firms with the largest decline in leverage, exhibit a larger performance drop over their matchers compared to firms with the largest increase in leverage. However, over the 1 and 3 years post-issue, these SEO firms with the largest decline in leverage, show a lower underperformance over their matchers compared to firms with the largest increase in leverage. On the longer run - over the 5-year period particularly - the picture reverses.