Long Run Performance of Rights Issues and FPOs: Evidence from India

Abstract

In this article, we study the long run equity performance of Indian firms which issued Seasoned Equity Offering (SEO) during the period January 2010–December 2022. With a sample of 177 such SEO issuing firms, we show that the long run equity performance of these SEO issuing Indian firms have been significantly inferior compared to firms from the same industry which are similar w.r.t other parameters like size, age and price-book ratio. Investing in an SEO at the close of the first trading day and holding it for 5 years, on an average, gave 17% (3% on an annualised basis) fewer returns than comparable firms. This pattern is more or less independent of the market conditions (bull or bear) except for a brief period during the global financial crisis. The study’s findings suggest that Indian firms that issue SEOs may be underperforming their industry peers over the long term. This could be due to a number of factors, such as the companies raising capital for dilutive purposes, using the proceeds to invest in underperforming projects, or facing challenges in integrating new equity into their existing business operations. Additionally, the study’s findings highlight the importance of careful consideration of long-term performance when evaluating investment opportunities in SEOs. To further explore the factors contributing to the underperformance of SEO-issuing firms, future research could investigate the specific reasons for their lower returns, analyze the impact of different types of SEOs (e.g., rights issues vs. follow-on public offerings) on long-term performance, and examine the role of market timing and investor sentiment in influencing the performance of SEOs.