We analyze tests for long-run abnormal returns and document that two approaches yield well-specified test statistics in random samples. The first uses a traditional event study framework and buy-and-hold abnormal returns calculated using carefully constructed reference portfolios. Inference is based on either a skewnessadjusted t-statistic or the empirically generated distribution of long-run abnormal returns. The second approach is based on calculation of mean monthly abnormal returns using calendar-time portfolios and a time-series t-statistic. Though both approaches perform well in random samples, misspecification in nonrandom samples is pervasive. Thus, analysis of long-run abnormal returns is treacherous. COMMONLY USED METHODS TO TEST for long-run abnormal stock returns yield misspecified test statistics, as documented by Barber and Lyon ~1997a! and Kothari and Warner ~1997!. 1 Simulations reveal that empirical rejection levels routinely exceed theoretical rejection levels in these tests. In combination, these papers highlight three causes for this misspecification. First, the

The share of equity issues in total new equity and debt issues is a strong predictor of U.S. stock market returns between 1928 and 1997. In particular, firms issue relatively more equity than debt just before periods of low market returns. The equity share in new issues has stable predictive power in both halves of the sample period and after controlling for other known predictors. We do not find support for efficient market explanations of the results. Instead, the fact that the equity share sometimes predicts significantly negative market returns suggests inefficiency and that firms time the market component of their returns when issuing securities.

We extend the literature on secondary issues of common stock by examining long-run stock and operating performance. In contrast to the performance of primary equity issuers, the long-run stock performance of firms following secondary distributions is positive, but not significant. For a subsample of secondary issuers in which the seller is an insider, however, both three- and five-year post-issue abnormal stock returns are significantly negative. The operating performance of these firms also declines subsequent to the issue. This supports the hypothesis that the negative performance of secondary equity offerings can partly be attributed to managers exploiting “windows of opportunity ” by issuing overvalued shares.

Studies of the long-run returns of equity issues find that the poor performance of new issues is common to non-issuers with similar characteristics. This paper examines the view that such evidence suggests that managers game long-run returns of the total market and their respective industry when timing new equity issues. This form of the timing hypothesis is modeled formally to motivate the empirical tests. Using aggregate new equity offering volume from 1970 to 1993, the empirical evidence in this paper supports some forms of successful gaming of market and industry valuation. In particular, the clustering of equity issue volume of smallcapitalization firms is found to be strongly correlated with subsequent returns of non-issuing, small-capitalization stocks. Industry results suggest that equity offerings appear to also coincide with peaks in the valuation of their respective industries. The economic gains to such timing behavior are highly significant.

This paper finds that CEOs tend to trade in their firm’s stock better than the average investor and in particular seem to time their trade well. More importantly, the study shows that CEOs who trade well in their firm’s stock demonstrate superior performance in running their firm. In further support to the association between managerial talent and timing ability, those CEOs with better ability to time their trades have a higher level of compensation, are employed by companies that demonstrate good corporate governance, and head their respective firms for longer periods. Timing ability is an observable characteristic of CEOs which can supplement other CEO characteristics in the search and hiring decisions. JEL Classification: G11 G14

Because of the difficulty in multi-dimensional matching and missing variables, investigation of long-run stock performance after major corporate events has been plagued by the “bad model problem”. This study contributes to the literature by implementing the propensity score estimator which is able to match firms in multiple dimensions simultaneously, and illustrate this methodology in the context of seasoned equity offerings (SEOs). We find that firms ’ SEO decisions are affected by the following characteristics: size, book-to-market ratio, past returns, and capital surplus. When matching SEO and non-SEO firms in all these dimensions via propensity scores, we are able to achieve much better matches than traditional matching methods. Furthermore, the commonly documented SEO underperformance disappears. Although it is premature to conclude the non-existence of long-run underperformance of SEO firms because of limited data here, this paper undoubtedly establishes a new methodology that can be generally useful for long-term performance study in empirical finance research. 2 I.

Insider trading and performance of seasoned equity offering firms after controlling for exogenous trading needs Inmoo Lee* Department of Business Administration, Korea University, Seoul 136-701, Korea Insiders trade not only because they have private information about their companies but also because of other exogenous reasons. Therefore, it is important to control for exogenous trading needs in empirical studies regarding insider trading. Lee (1997) shows that insider trading is not closely related to the long-term performance of primary seasoned equity offering firms. This paper examines whether the results hold after controlling for exogenous needs to trade by using an inequality test with

The positive stock price reaction to stock buyback announcements reported in many previous studies is commonly interpreted as a signal that the firm’s future profitability will rise, or that the firm is decreasing its agency costs by dispersing free cash flow, or that the firm is increasing its leverage toward a more optimal capital structure. Consistent with prior work, we find that our sample firms repurchase most (and more in many cases) of the shares that they target in their announcements. When firms repurchase shares, however, they are not required to deregister them and we find that our sample firms also issue shares following buyback announcements. In fact, our average sample firm increases its shares outstanding 23.73 percent following its buyback announcement, and our typical sample firm has an insignificant change of –0.88 percent. With no change in shares outstanding, our results are generally not supportive of commonly accepted buyback theories. For example, we find no consistent evidence of positive long-term abnormal operating performance or stock returns following buybacks; we also find no consistent evidence of a decrease in cash flow from financing, or an increase in the firm’s debt ratio or default risk. Instead, we find that the buying and selling of their own shares that firms do following buyback announcements increases their stock’s liquidity and this explains the positive stock price reaction to these announcements. Why are Stock Buyback Announcements Good News? Many studies show that the stock market reacts positively to stock buyback

We examine the cross-sectional relation between the twelve-month real change in shares outstanding and stock returns. During the post-1970 time period, change in shares outstanding exhibits a strong cross-sectional ability to predict stock returns. This predictive ability is typically stronger than the predictive ability of size, book-to-market, or momentum. Our finding is related to research that finds that long-run returns are associated with share repurchase announcements and seasoned equity offerings, although our finding is not attributed to this association. We also provide novel estimation of the share change relation in the pre-1970 time period and find no statistically significant predictive ability. Whether or not long-run stock returns following share repurchase announcements and seasoned equity offerings reflect mispricing has been debated by the finance literature. Loughran and Ritter (1995) have argued that long-run stock performance following seasoned equity offerings reflect negative abnormal returns, whereas Ikenberry, Lakonishok, and

We examine stock-price performance around secondary equity offerings. Firms whose shares are sold in these offerings have positive abnormal pre-offering performance, negative market reaction to the announcement of the offering, and positive abnormal post-offering performance. Difference in risk, tax-motivated selling, trading before the end of the year, and the momentum effect cannot explain abnormal post-issue performance. Our findings provide support for the disposition effect associated with investor tendency to sell winners and, in particular, investors ' expectations of mean reversion. To reconcile the findings about stock-price performance after secondary and primary issues, we offer a simple model based on selection bias and investor and manager overconfidence about their ability to identify firms with good and poor future opportunities. 3 The optimal time for investors to sell firm shares they own is when the firm is overvalued. A negative stock market reaction to the announcements of secondary equity offerings (e.g., Mikkelson and Partch (1985) and Asquith and Mullins (1986)) is