Abstract
It is known that firms which issue new equity under perform subsequently. In this paper I show that under performance by issuers is confined to firms which are hard to value, while issuance activity does not significantly predict future returns for easy to firms. Hard to firms include small cap, firms with high dispersion in analyst estimates and recommendations, and firms with more distant cash-flows, such as firms with low profitability, low dividend yield, or high asset growth. Further, I show that only the negative component of seasoned equity offering (SEO) event returns significantly predicts one year post-SEO returns. These results are consistent with a model in which informed investors receive noisy signals of fundamental value and shorting is constrained or costly.
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