The Long-Term Performance of Corporate Bonds (and Stocks) Following Seasoned Equity Offerings

Previous studies document negative long-term abnormal stockreturns following seasoned equity offering (SEO) issuances andconclude that markets are inefficient. Other studies, however,argue that these results are a manifestation of risk mismeasurement(i.e., the bad-model problem), not market inefficiency. We testthe efficient market hypothesis (EMH) and avoid the bad-modelproblem by examining the long-term performance of our samplefirms' bonds and stocks following their SEOs. Our results areinconsistent with the EMH. We also provide evidence that SEOstransfer wealth from shareholders to bondholders because SEOsreduce default risk.