Is the Market Optimistic about the FutureEarnings of Seasoned Equity OfferingFirms?

Abstract

The leading explanation for the post-issue long-runstock return underperformace of seasoned equityoffering firms is that investors have optimisticexpectations regarding future earnings and theunderperformance occures as these expectations arecorrected over time. To directly test thishypothessis, we examine investors' reaction toquarterly earnings announcements over a five-yearperiod following the offering for a large sample ofseasoned equity issuing firms. In general, ourevidence suggests that investorsare not disappointedby earnings announcements that follow seasonedequity offerings. This result is not sensitive towidening the windown over which earningsannouncement returns are computed. This result alsoholds true for subsets of equity issuing firms. Thechoice fo these three subsets is predicated byextant evidence that these firms are likely toconvey relatively more unfavorable informationthroung their earnings announcements. Overall, ourfindings are inconsistent with the optimisticexpectations hypotgesis.