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

Existing empirical evidence suggests that the announcement-day reaction to equity issuance is about 2.88 percent more negative than the reaction to debt. However, announcement-day returns do not accurately reflect investor reaction if issue announcements are anticipated. I re-examine the announcement-day reaction to equity and debt issues after controlling for the predictability of security type and for firms' previous issue experience. Results indicate that the reaction to a first-time seasoned equity issue is more than 4.15 percent more negative than the reaction to debt. This increase over the conventional estimate suggests that the reaction to equity may be more negative, relative to debt, than previously believed. The evidence supports the assertion that giving preference to debt over equity could reduce issue costs when asymmetric information is a problem. Timing and certification strategies for lowering issue costs appear to be relatively unimportant for debt issues.     

RETURN INTERVAL,FIRM SIZE AND SYSTEMATIC RISK ON THE DUTCH STOCK MARKET

In this paper we investigate the behavior of betas of 50 Dutch firms as a function of the return measurement interval. We find beta estimates measured from different intervals differ significantly from each other. As the sample mainly contains stocks that are relatively thin compared to the index, beta estimates from short intervals are on average lower than those obtained from longer intervals. The results further indicate that there exists some variability in the beta coefficients for each interval length. Betas depend on the manner daily prices are juxtaposed to calculate the returns. A way to account for this variability is to average the different betas for each interval length. Asymptotic betas are also computed to show the appropriateness of this method. Finally we show that the size effect is reduced when the interval length is increased, although it remains statistically significant.     

PORTFOLIO PERFORMANCE IN RELATION TO QUALITY,EARNINGS, DIVIDENDS,FIRM SIZE,LEVERAGE, AND RETURN ON EQUITY

This paper examines the risk-return performance of portfolios formed from S&P quality rankings over the time period 1970–1979. In addition, the risk-return characteristics of the portfolios are compared with performance as measured by fundamental data regarding earnings, dividends, firm size, leverage, and return on equity. The results suggest that the S&P quality rankings are closely correlated to risk as measured by the variability of returns and earnings changes, but the rankings are not correlated with the variability of dividend changes. The quality rankings are not uniformly correlated with mean portfolio returns or mean dividend changes, nor is the relationship between quality and mean earnings changes strong. Finally, quality rankings are related to firm size and return on equity. However, relationships between quality and leverage are discernible only at the extremes.     

MARKET EXPECTATIONS AND THE VALUATION EFFECTS OF EQUITY ISSUANCE

We examine how the wealth effects of equity offers are influenced by investors' expectation of the equity type (public or private) to be issued. Firms deviating to the public market may be issuing when information asymmetry or agency costs are high, and their wealth effects are more negative than for firms that are anticipated to issue equity publicly. Firms deviating to the private market, however, may signal firm undervaluation or monitoring benefits and experience more positive wealth effects than firms that are expected to issue equity privately. For the private issues, public market accessibility appears to influence the wealth effects.     

CHANGES IN CAPITAL STRUCTURE,NEW EQUITY ISSUES,AND SCALE EFFECTS

This study determines the impact of a new issue of common stock on security holder wealth and the magnitude attributable to transaction costs, tax shield dilution, wealth transfers, and informational content. The empirical results indicate that shareholders of firms announcing new equity issues experience significant, abnormal, negative returns. The per share transaction cost accounts for 22.6 percent of the observed abnormal return. The tax shield dilution effect accounts for 7.8 percent. No evidence of a wealth transfer effect is found. Thus, approximately 70 percent of the abnormal return can be attributed to new unfavorable information that becomes available to the market.     

EARNINGS EXPECTATIONS, FIRM SIZE, AND THE INFORMATIVENESS OF STOCK PRICES

The notion that prices impound a wide array of information, including market expectations, has led to earnings forecast models conditioned on prices. Yet, presumably, analysts' forecasts capture both public information and certain private information not previously impounded in prices. Accordingly, price-based models are seemingly an inefficient, and less effective, source of expecta-tions. This article investigates this hypothesis using financial analysts', price-based, and naive forecasts. Results indicate that analysts' forecasts (1) are at least as accurate as price-based and naive models, and (2) yield better expectations for market tests relating returns and earnings. These inferences are robust across different information environments. The evidence suggests that analysts either possess private information or are more effective information processors, or both.     

THE EFFECT OF SIZE,BOOK-TO-MARKET EQUITY,PRIOR RETURNS,AND BETA ON STOCK RETURNS: JANUARY VERSUS THE REMAINDER OF THE YEAR

Size and book-to-market equity are shown to transcend beta in explaining stock returns. One possible explanation of the book-to-market equity effect is overreaction. We investigate the effect of size, book-to-market equity, prior returns, and beta on stock returns. We find significant reversals in January consistent with overreaction. We find a strong positive relation between returns and prior returns for February through December. Both patterns are distinct from either a size or book-to-market equity effect. Book-to-market equity is significantly related to returns, with some evidence of a stronger effect in January.