The Long-Run Performance of Secondary Equity Issues: A Test of the Windows of Opportunity Hypothesis

Abstract

We examine long-run stock and operating performance following secondary equity offerings. For a subsample of secondary issuers in which the seller is an insider, both three- and five-year post-issue abnormal stock returns are significantly negative. The findings are robust to alternative long-run abnormal return measurement methodologies. The abnormal returns are large relative to the initial market reaction (mean and median five-year abnormal returns of -33.33% and -73.80%, respectively). 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 be attributed to managers exploiting windows of opportunity by issuing overvalued shares.