Prospectus Disclosure and the Long-run Performance of Seasoned Equity Issuers in the UK
This study examines if the prospectus disclosure of the motives for a seasoned equity offering and the choice of the underwriter explain the long-run performance of equity issuers in the UK.
An updated version of the research paper was uploaded here on 8th December 2014. It is available for download below.
There is plenty of research evidence to show that seasoned equity offering firms (SEOs) underperform over three to five years after the issue. However, what previous studies have failed to demonstrate conclusively is whether prospectus information on the issue motive can actually help investors predict the post-issue performance. Such evidence is important because the prospectus is the primary source of information investors can use to evaluate both the reasons why firms issue equity, and their prospects after the offering. Until now there has been no study of how the choice of the underwriter impacts SEO's post-issue performance in the UK either. Using a sample of UK equity offerings, this study examines if investors can use prospectus information on the intended use of the issue proceeds and whether the issue is underwritten by a high quality broker to forecast post-issue SEO performance.
Focusing on the UK, this research finds that SEOs stating investment purposes do not exhibit abnormal performance after the offering, while SEOs intending to use the proceeds for general and recapitalisation purposes significantly underperform. In addition this study documents a positive relation between underwriter quality and SEO post-issue performance in the UK: offerings sponsored by high-quality brokers show no evidence of abnormal performance, but issues underwritten by low-quality underwriters display significant underperformance. Finally, the research shows that the variation in abnormal returns due to the intended use of proceeds motive is independent of the variation due to the underwriter quality effect. Together, the results suggest that the prospectus information on the intended use of the offering proceeds and on the issue underwriter predicts post-issue stock performance.