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The Information Effects of Analyst Activity as the Announcement of New Equity Issues

Author

Listed:
  • Ranjan D'Mello
  • Stephen Ferris

Abstract

Myers and Majluf (1984) argue that informational asymmetry between managers and investors can explain the negative stock returns around the announcement of new equity. Using analyst following and consensus as proxies for information asymmetry, we observe that announcement period returns are significantly more negative for firms followed by fewer analysts and whose forecasts exhibit less consensus. Our findings hold after controlling for firm size and growth opportunities. Finally, we find evidence suggesting that analyst activity also influences firms’ long-term performance. We conclude that the information role of security analysts partially explains the negative stock returns surrounding the announcement of new equity.

Suggested Citation

  • Ranjan D'Mello & Stephen Ferris, 2000. "The Information Effects of Analyst Activity as the Announcement of New Equity Issues," Financial Management, Financial Management Association, vol. 29(1), Spring.
    • Handle: RePEc:fma:fmanag:dmello00
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    Cited by:

    1. Steven J. Huddart & Bin Ke, 2007. "Information Asymmetry and Cross†sectional Variation in Insider Trading," Contemporary Accounting Research, John Wiley & Sons, vol. 24(1), pages 195-232, March.
    2. Miglo, Anton, 2021. "A New Capital Structure Theory: The Four-Factor Model," MPRA Paper 105102, University Library of Munich, Germany.
    3. Miglo, Anton, 2004. "Pecking order theory for government finance," MPRA Paper 89017, University Library of Munich, Germany, revised 2018.
    4. Ivan Brick & N. Chidambaran, 2008. "Board monitoring, firm risk, and external regulation," Journal of Regulatory Economics, Springer, vol. 33(1), pages 87-116, February.
    5. Lin, Zih-Ying & Chang, Chuang-Chang & Wang, Yaw-Huei, 2018. "The impacts of asymmetric information and short sales on the illiquidity risk premium in the stock option market," Journal of Banking & Finance, Elsevier, vol. 94(C), pages 152-165.
    6. Premti, Arjan & Garcia-Feijoo, Luis & Madura, Jeff, 2017. "Information content of analyst recommendations in the banking industry," International Review of Financial Analysis, Elsevier, vol. 49(C), pages 35-47.
    7. Sanjay Deshmukh, 2003. "Dividend Initiations and Asymmetric Information: A Hazard Model," The Financial Review, Eastern Finance Association, vol. 38(3), pages 351-368, August.
    8. He Xiao & Jianqun Xi, 2021. "The impact of COVID‐19 on seasoned equity offering: Evidence from China," Pacific Economic Review, Wiley Blackwell, vol. 26(4), pages 539-572, October.
    9. Marc Zenzius & Christian Flore & Dirk Schiereck, 2022. "Tough times for seasoned equity offerings: performance during the COVID pandemic," Journal of Business Economics, Springer, vol. 92(9), pages 1491-1510, November.
    10. Drobetz, Wolfgang & Grüninger, Matthias C. & Hirschvogl, Simone, 2010. "Information asymmetry and the value of cash," Journal of Banking & Finance, Elsevier, vol. 34(9), pages 2168-2184, September.

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