Pre-Issue Investor Optimism and Post-Issue Underperformance

Abstract

Prior studies have documented long-run stock market underperformance after security offerings. Some studies conjectured that the post-issue underperformance might be the result of pre-issue investor optimism. The study reported here investigated (1) whether investor optimism is associated with post-issue underperformance, (2) how investor optimism changes in the one-year period surrounding the security-offering month, (3) whether investor optimism differs between equity issuers and debt issuers, and (4) whether such differences affect companies’ financing choices. We confirmed underperformance of debt and equity issuers and found that the post-issue buy-and-hold abnormal returns are negatively associated with pre-issue investor optimism. We found little evidence, however, that investor optimism affects companies’ financing choices.