Secondary equity offerings as a leading indicator of market performance

Abstract

Secondary Equity Offerings as a Leading Indicator of Market Performance examines the perception of an imminent market downturn as a motive behind new dilutive stock issuances. Market conditions, represented by the value of the TSX composite index, are found to have a weak , yet significant relationship with the total gross proceeds of secondary offerings. The paper interprets this relationship as evidence that an influx of seasoned equity offerings is a leading indicator of a market downturn. The paper suggests that this is a result of opportunistic managers cashing in on favourable market conditions in order to insulate their capital holdings while the opportunity is still available. The paper observes a trend in which the leading secondary issuances tend to occur in two distinct peaks. The “dual peak” effect is believed to be a product of herding by managers due to relative risk sensitivity.