Does market misvaluation help explain share market long-run underperformance following a seasoned equity issue?

Brown, Philip S., Gallery, Gerry T., & Goei, Olivia (2006) Does market misvaluation help explain share market long-run underperformance following a seasoned equity issue? Accounting and Finance, 46(2), pp. 191-219.

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We examine the relation between pre-SEO announcement date misvaluation and long-run post-SEO performance for a large sample of Australian seasoned equity offerings (SEO) made between 1993 and 2001. Our study is motivated by inconsistent findings across countries with respect to the SEO long-run underperformance anomaly first documented in the US, inconclusive findings with respect to the hypothesis that managers exploit market misvaluation when timing equity issues, and a recent Australian Stock Exchange proposal to loosen SEO regulation. We find SEO firms underperform common share market benchmarks for up to five years after the announcement. Using a residual income valuation method, we show this underperformance is related to pre-announcement date misvaluation. An unexpected result is that underperformance and misvaluation are more severe for private placements than rights issues. Institutional factors unique to the Australian setting, particularly the large number of smaller loss-making firms among private placement issuers, appear to explain the poorer performance of placement firms. Our results are robust to various measurement methods and assumptions, and demonstrate the importance of researching SEO performance in alternative institutional settings.

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4 citations in Web of Science®

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ID Code: 5194
Item Type: Journal Article
Refereed: Yes
Keywords: Residual income valuation, Seasoned equity offerings, Long, run underperformance
DOI: 10.1111/j.1467-629X.2006.00172.x
ISSN: 0810-5391
Subjects: Australian and New Zealand Standard Research Classification > COMMERCE MANAGEMENT TOURISM AND SERVICES (150000) > ACCOUNTING AUDITING AND ACCOUNTABILITY (150100) > Financial Accounting (150103)
Divisions: Current > QUT Faculties and Divisions > QUT Business School
Current > Schools > School of Accountancy
Copyright Owner: Copyright 2006 Blackwell Publishing
Copyright Statement: The definitive version is available at
Deposited On: 01 Jul 2008 00:00
Last Modified: 29 Feb 2012 13:18

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