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The changes in abnormal returns of a security around event announcement may be due to event-induced, firm-specific or event-related factors. There are a host of studies that have looked into factors that influence stock returns for seasoned issue announcements (Asquith and Mullins, 1986; Mikkelson and Partch, 1986; and Kalay and Shimrat, 1987). However, Barclay et al. (1990) have found that there exists a relationship between announcement effect on abnormal returns and the issuing firms’ information asymmetry, profitability, growth, and the issue characteristics. An analysis of factors affecting abnormal returns around the announcement of new equity issue is important for the following reasons: (1) unrecorded goodwill may be reflected in the stock price which is not captured by the event itself;
(2) managers have superior information about investment projects compared to investors; and (3) the issuing firm’s current financial structure and the impact of new equity issued on its financial situation are also important factors considered by investors in their valuation of equity offerings. Though empirical work has focused on examining the significance of the change in abnormal returns, studies exploring the extent of influence of firm-specific or event-related factors on abnormal returns are limited.
The literature shows that issue size has a mixed impact on the firm’s abnormal returns (Hess and Bhagat, 1986; Abhayankar and Dunning, 1999; Marsden, 2000; Bigelli, 2002; Kato and Tsay, 2002; Tan et al., 2002; and Wu et al., 2005). A positive relationship between pre-market condition and a firm’s abnormal returns has been documented by Choe et al. (1993),Tsangarakis (1996) and Tan et al. (2002). Different firm characteristics have a significant effect on the firm’s abnormal returns (Balachandran et al., 2005). |
