Long-run underperformance of seasoned equity offerings: Fact or an illusion?

This paper uses Australian data from 1984 to 1993 to show that the long-run underperformance of seasoned equity offerings is related to the definition of ‘long-run’. We demonstrate that following the period delimited by other writers as the long-run, issuing firms turn around in their performance and in fact outperform their corresponding benchmarks, sometimes more than making up for the initial losses. We show that the initial underperformance affects the issues of companies performing more than one seasoned equity offering (SEO) in a similar fashion. Our results, the first to examine Australian long-run SEO performance, show that underperformance of Australian seasoned equity issues is dependent on the definition of the ‘long-run’. (Allen and Patrick [D.E. Allen, M. Patrick, Some further Australian evidence on the long-run performance of initial public offerings: 1974–1984, Pac. Basin Financ. Markets 2A (1996) 133–155. [1]] examined long-run IPO performance.) When long-run is defined as 12 years instead of the usual 5 years, SEOs can be clearly seen to turn around their performance particularly during years six and seven. A series of regression results point to a number of factors that bear influence on the extent of the initial underperformance. Decreased ex-ante uncertainty associated with older firms causes a negative relationship between the age and the extent of underpricing. Moreover, the greater is the SEO cost specifically associated with underpricing of the new equity, the greater is the underperformance that follows the issue.