The Information Content of Corporate Offerings of Seasoned Securities: An Empirical
Analysis
Author(s): Robyn McLaughlin, Assem Safieddine and Gopala K. Vasudevan
Source: Financial Management, Vol. 27, No. 2 (Summer, 1998), pp. 31-45
Published by: Wiley on behalf of the Financial Management Association International
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The Information Content of Corporate
Offerings of Seasoned Securities: An
Empirical Analysis
Robyn McLaughlin, Assem Safieddine, and Gopala K. Vasudevan
Robyn McLaughlin is an Associate
Professor at the Sawyer School of
This paper examines the information content of offerings of seasoned
Management, Suffolk University.
Assem Safieddine is an Assistant
Professor at Michigan State
relationship between information asymmetry and long-run changes in
firm operating performance around the offerings. Both debt and equity
issuers have post-issue declines in operating performance, both on an
unadjusted basis and when compared to control groups based on firm
University. Gopala K. Vasudevan is
an Assistant Professor at the Sawyer
School of Management, Suffolk
University.
securities (equity and debt) by public corporations by analyzing the
size and operating performance. Among equity issuers, firms with greater
information asymmetry have larger post-issue performance declines.
The difference is smaller for debt issuers. We find that these results hold
even after controlling for other variables which can affect operating
performance, such as free cash flow, performance run up, and investment
in property, plant, and equipment. Our results are consistent with
information models of the decision to issue securities, such as Myers
and Majluf (1984).
0 US corporations raised an average of $287.84debt and issuers of seasoned equity.1
billion annually in public sales of debt and equity We analyze the information content of corporate
securities between 1980 and 1993 (Investment
securities offering announcements by examining the
relationship between the level of firm information
Dealers' Digest, 1994). In general, the market reacts
asymmetry and post-offer changes in operating
unfavorably to the announcements of these security
performance of debt and equity issuers. Also, we
issues, and the stock price reaction is more negative
for riskier securities. Several information models of
test this relationship after controlling for other
the decision to issue securities can explain thesefactors previously shown to be associated with postissue changes in operating performance. Our evidence
price reactions (see, for example, Miller and Rock,
is
1985; Myers and Majluf, 1984; and Smith, 1986).consistent with information models of the decision
to issue securities. Operating performance falls
We hypothesize that information conveyed by the
subsequent to all securities issues and the decreases
announcement of corporate securities offerings will
are greater for firms that issue equity, the lowerbe reflected in the issuing firm's post-issue
seniority claim. Among equity issuers, firms with
operating performance. We explore this conjecture
higher market-to-book ratios and smaller firms have
empirically by examining and comparing the longlarger post-issue declines in performance. These
run operating performance of issuers of straight
differences are smaller for debt issuers.
We are grateful for comments from K.C. Han, Kose John,
Stewart Myers, Alekos Prezas, Anil Shivdasani, Robert Taggart,
'For evidence concerning announcement period stock price
Sheridan Titman, Nickolos Travlos, William Wilhelm,
reactions for equity issues, see Asquith and Mullins (1986);
participants at the 1996 meetings of the Financial Management
for debt, see Eckbo (1986); and for both debt and equity, see
Association at New Orleans, seminar participants at Boston
Jung, Kim, and Stulz (1996).
College, two anonymous reviewers, and the Editors.
Financial Management, Vol. 27, No. 2, Summer 1998, pages 31 - 45
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32 FINANCIAL MANAGEMENT / SUMMER 1998
Controlling for other factors,
that
equ
However, the pricewe
drop isfind
still substantially
lessfor
than
issuers investment in property,
plant,
and
equipm
the documented effect
for equity issues.
Akhigbe,
is positively associated
Easterwood,
with
and Pettit
changes
(1997) find that
in
the stock
operat
performance. In contrast,
debt
issuers,
su
price reactionfor
to debt issue
announcements
depends
investment is associated
with
decline
on the motivation
for the larger
issue. They find that
the
operating performance stock
following
the when
offering.
Eq
price reaction is negative
firms issue
issuers that have greater
improvements
in
operati
debt following
an unexpected cash flow
shortfall.
performance prior to the
offer
However,
they also(performance
find that the reaction is not "runalso have the larger decreases
in performance
significantly different
from zero when the issue follow
is
the offering. We do not motivated
find by
such
a relationship
an unexpected
refinancing of existingfor d
issuers. Finally, we do not
a significant
debt, find
an unexpected
increase in leverage, relation
or an
between free cash flow
opera
unexpectedand
increase inpost-issue
capital expenditures.
performance changes for
Gombola,
either
Lee, anddebt
Liu (1997)or
find that
equity
there is issu
Our research extends
the insider
empirical
literature
significant
selling by managers
following
analyzing the association between operating
seasoned equity offerings and that the insider selling
performance and the level of issuing firm information is higher among growth firms. This is consistent with
asymmetry. A second contribution of this research is our evidence that growth firms have larger declines in
the examination of the long-run operating performance operating performance following equity issues.
of a large sample of straight-debt-issuing firms, which Several information models of the decision to issue
complements previous large-sample studies of firmssecurities can explain these price reactions. One of the
making seasoned equity offerings (SEOs) (Loughran most influential of these models is Myers and Majluf
and Ritter, 1997; and McLaughlin, Safieddine, and (1984).3 In their model, corporate managers have better
Vasudevan, 1996). Third, we compare the information information than outside investors about the value of
effects for debt and equity issuers after controlling forthe firm's assets. This creates an adverse-selection
other factors associated with changes in issuer problem because managers, acting on behalf of existing
shareholders, will avoid issuing securities they
operating performance.
The paper is organized as follows. The first
perceive to be underpriced in the market. Investors,
section discusses related theoretical and empirical
realizing this, will react negatively to the issue of any
work. Section II describes the sample selection
risky security. The differences between the managers'
procedure and presents summary statistics for theand outsiders' valuations are likely to be greater for
samples of debt and equity issuers. Results for
junior securities such as common stock, which are more
operating performance are presented in Section III. sensitive to changes in firm value, than for senior
Section IV contains a summary of our findings and claims such as debt. In their model, managers will prefer
concluding remarks.
to fund investments internally and to issue lower-risk
I. Theoretical and Empirical Background
Krasker (1986) extends the Myers-Majluf (1984) model,
and Korajczyk, Lucas, and McDonald (1991) model the
securities when they need to raise outside capital.
Several papers have examined stock price reactions decision to issue equity in a multiperiod setting.
Several other theories can also explain these price
to announcements by firms raising capital (for example,
reactions
and performance changes around securities
Akhigbe, Easterwood, and Pettit, 1997; Asquith and
Mullins, 1986; Eckbo, 1986; Masulis and Korwar, 1986; issues. Jensen (1986) argues that managers prefer to
and Mikkelson and Partch, 1986).2 These papers retain excess cash in the firm and may use the cash for
document an average stock price reaction to the
value-reducing activities, such as investment in
negative-net-present-value projects, rather than pay
announcement of an equity issue by industrial firms
of -3%. In contrast, they find that the announcement out the cash to shareholders. This problem is
especially acute for firms with limited numbers of
effect of a straight debt offering is not significantly
positive-net-present-value investments. Capital
different from zero.
Chaplinsky and Hansen (1993) argue that the market
partially anticipates debt issues, thus muting the stock
structure can be one of the means used to constrain
managerial behavior. Use of debt reduces the cash flow
available for discretionary spending by managers and
effectively
bonds them to pay out future cash flows
for market expectations, they find a significant negative
because
bondholders
have recourse to the bankruptcy
announcement effect for unanticipated debt offerings.
price reaction to the announcement. After controlling
court in the event the firm defaults. In contrast, although
2Harris and Raviv (1991) provides a recent survey of the
dividends or stock buybacks can also reduce the cash
literature on the theory of capital structure. The literature on
securities issues is surveyed in Smith (1986). Eckbo and Masulis
(1995) survey the literature on seasoned equity issues. 3See also Krasker (1986).
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MCLAUGHLIN, SAFIEDDINE, & VASUDEVAN / INFORMATION CONTENT OF CORPORATE OFFERINGS 33
available to managers, shareholders cannot force the firm its debt or equity offering available in the database
to pay out the cash. Thus, one implication of the free maintained by the Securities Data Company.
cash flow theory is that the change in performance
2. Debt offerings have a maturity of at least three
following an equity issue should be more negative than
years and an offer size of at least $30 million.
the change in performance following debt issues.
Offerings of convertible debt and debt issues with
Miller and Rock (1985) provide an alternative
non-positive pre- to post-issue changes in firm
leverage (debt rollovers) are excluded.
explanation for the price reactions and performance
changes. In their model, insiders have more information
than outsiders about the future cash flows of the firm.
All firms have fixed investment opportunities with 3. Equity offerings exclude initial public offerings,
offerings that were announced but subsequently
diminishing marginal returns. Since the sources of
withdrawn,
joint issues of equity and debt, shelf
funds (cash flows from operations plus the sale of
registration issues, rights offerings, secondary
securities) must equal the uses of funds (investment
issues, and units offerings.
plus dividends), securities offerings signal that the
firm has had an unexpected fall in earnings. Thus, the
Miller-Rock model also associates announcements of
4. A maximum of one offering per year is included per
firm.
securities offerings with negative stock price reactions
and negative changes in performance. However, the
5. Issuing firm balance sheet data must be available
Miller-Rock model does not distinguish between debt
from the annual Compustat data files.
and equity offerings.
In prior empirical work on issuing firm operating
Our original sample of debt issues includes 1,265
performance, Healy and Palepu (1990) examine the
issues. However, 305 issues resulted in a zero or
changes in earnings, analysts' earnings forecasts, and
negative change in firm leverage. These issues were
changes in risk for a sample of 93 seasoned equity
excluded from our sample since the firms are typically
issuing firms listed on the New York Stock Exchange
(NYSE) and the American Stock Exchange (AMEX).
simply replacing currently maturing debt ("roll-overs"),
and thus these announcements are unlikely to convey
They find no change in analysts' earnings forecasts
but do find an increase in risk following the offering.
new information.4 Table 1 reports the distribution of
In contrast, Hansen and Crutchley (1990) find a decline
equity and debt offerings by calendar year. Although
the full sample has 1,967 equity offerings and 960 debt
in firm earnings subsequent to securities issues. Patel,
offerings, the sample sizes in the tests reported in our
Emery, and Lee (1993) examine the long-term cash-flow
study vary because of missing data items on Compustat.
performance of publicly traded firms that issue straight
debt, convertible debt, or common stock. Focusing on
We use pre-tax operating cash flows to measure
a signaling explanation for the decline in performance,
operating performance rather than earnings for two
reasons. First, earnings include interest expense,
they find that although issuer performance declines,
issuers still perform better than other firms in their
special items, and income taxes, which can obscure
industries and that firms with larger offerings have
operating performance, the focus of our research.
Second, operating cash flows represent the economic
greater declines in performance. Loughran and Ritter
(1997) and McLaughlin, Safieddine, and Vasudevan (1996)
benefits generated by the firm, and as a pretax
they are unaffected by the changes in tax
examine the changes in operating performance for measure,
large
status or capital structure that accompany securities
samples of seasoned equity issuers. Both studies find
issues (see Barber and Lyon, 1996). Since the level
that the operating performance of issuing firms declines
of these economic benefits depends on the total value
subsequent to the issue. Loughran and Ritter (1995)
the firm's assets, we scale cash flows by the book
and Spiess and Affleck-Graves (1995) find thatof
SEO
firms have poor post-issue stock-price performance.
value of firm assets to obtain a performance measure
Spiess and Affleck-Graves (1996) find that debt issuers
that we can compare across firms and through time
also have poor post-issue stock-price performance.
(henceforth, cash flow return). Pre-tax operating cash
flows are net sales less cost of goods sold, and less
also selling and administrative expenses but before
II. Sample Construction
deducting depreciation and amortization expense
(Compustat item #13). Our measure of assets is the
We collected a sample of 1,967 equity offerings and
book
value of total assets (Compustat item #6). One
960 debt offerings that took place during the period 1980
issue
with
using asset value to scale post-issue
to 1993. These offerings meet the following criteria:
1. The firm is an industrial firm with information on
4Including these firms in the sample would not lead to a material
change in our results.
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34
FINANCIAL
Table
1.
MANAGEMENT
Sample
of
/
SUMMER
Debt
and
1998
Equity
The
sample of equity and debt offerings is br
the period 1980 to 1993 and are taken from
equity issues and 960 offerings of non-con
public offerings. Best-efforts and unit offer
preferred stock, or warrants. Sample debt iss
or more and a face value of $30 million or m
Year
Equity
Issues
Debt
Issues
1980
94
51
1981
89
26
1982
77
49
1983
272
1984
1985
1986
55
39
107
151
1987
34
77
103
130
65
1988
58
70
1989
94
62
1990
75
40
1991
234
82
1992
223
116
1993
308
146
Total
Number
of
Issues
1,967
960
the year prior
to the issue.
Third, we screened
potent
performance is that
asset
values
incr
matches for prior
performance.
eliminated all match
proceeds of the issue.
If
newWeassets
d
not within
90% to 110% of the issuing firm's this
ratio of ca
produce cash flows
immediately,
downward
and
bias
Lyon,
post-issue
to book value of assetsperformanc
in the year prior to the issu
in flow
post-issue
We
calculated
the performance this
of the control
portfol
We
address
issue
1996).
as the equal-weighted
of the
performance to
of t
performance
for average
five
years
assets to become productive. Also, in tests not
remaining firms. If no firm matches on SIC code, size, a
reported here, the results are qualitatively the sameprior performance, then we selected the best pr
when cash flows are instead scaled by sales.
performance match from the SIC code and size potent
matches as the control portfolio.
If this algorithm results in either no matching firm
or missing data, we adopted an alternative rule. Firs
we repeated the original algorithm using a one-di
We measure issuing firm abnormal operating
SIC code
performance in comparison to the performance
of ascreen. Second, we eliminated the SIC code
A. The Control Portfolio
screen. All sample firms were matched using either the
control portfolio. Control portfolios are constructed
original
for each issuing firm using a procedure based on
the algorithm or the alternative rule(s). We
methodology suggested in Barber and Lyon measured
(1996). issuer abnormal operating performance
by subtracting
the performance of the control
The portfolios are formed from firms that are listed
on
Compustat and have not issued equity (or debt portfolio
for thefrom the measure of performance for the firm
(henceforth,
match-adjusted cash-flow return).
debt-issuer control groups) during the prior five
years.
use this methodology to construct the control
We constructed the control portfolio usingWe
the
portfolio
following three-step algorithm. First, we matched
each and measure abnormal operating performance
for several reasons. First, using a matching portfolio
issuing firm to all non-issuers in the same two-digit
controls
SIC code. Second, we screened potential matches
forfor economy- and industry-wide effects on
performance. Second, matching on operating
size. We eliminated potential all matches notissuer
within
70% to 130% of the issuer's book value of assets in
performance controls for potential mean reversion in
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MCLAUGHLIN, SAFIEDDINE, & VASUDEVAN / INFORMATION CONTENT OF CORPORATE OFFERINGS 35
relationship between free cash flow and changes in
earnings and other operating ratios that have been
documented in prior studies (Fama and French, 1995;operating performance for equity issuers. We also expect
to find a more positive relationship between free cash
and Penman, 1991). Third, Barber and Lyon (1996)
conclude that tests using control firms not matchedflow and operating performance changes for debt issuers.
on performance are misspecified when the event firmsThe second control variable is operating performance
run-up, measured as the change in operating performance
have particularly strong or weak prior operating
from year -2 to -1. Loughran and Ritter (1995, 1997),
performance. SEO firms tend to have large increases in
both operating and stock-price performance prior toand McLaughlin, Safieddine, and Vasudevan (1996),
among others, have found that equity issuers have a
the issue, and so our tests could be misspecified if we
did not control for both firm size and pre-issuerun-up in both stock-price and operating performance
prior to the equity issue. Thus, a decline in performance
operating performance.
following the issue may not represent a permanent
In our tests of performance, we take two procedural
decrease in long-run performance. Rather, the
steps because of the skewness of accounting ratios
of the firm may simply be returning to its
(Barber and Lyon, 1966). To reduce the influence performance
of
outliers, we trim the sample, deleting debt and equity
pre-issue level. We control for this effect by including
issuers whose cash-flow return in the year prior to the
the change in operating performance from year -2 to
year -1 as an independent variable. We expect to find a
issue is below the first or above the 99th percentiles for
negative coefficient for the run-up variable.
their samples. We report means for this trimmed sample
and test for differences between groups using theThe third control variable we use is the change in
Wilcoxon signed-rank test under the null hypothesisgross property, plant, and equipment between year -1
to year j (where j=+1, +2, or +3 is the period to which
that the distributions of both groups are identical. This
approach is recommended by Barber and Lyon (1996)the performance change is measured) scaled by the
and the Wilcoxon signed-rank test has been used book
to value of firm assets. Firms that use issue proceeds
to invest in value-enhancing activities should have
test for abnormal operating performance by Loughran
better performance following the offering, and we thus
and Ritter (1997) and others. The regression models
discussed in the next section are estimated using theexpect a positive correlation between the investment
and the subsequent operating performance of the firm.
trimmed sample.
We use two variables as measures of information
B. Operating Performance
asymmetry, a dummy variable that takes the value one
if the firm has a market-to-book ratio of equity greater
We examine the operating performance of the issuing
than the sample median in year -1 and zero otherwise,
firms over a nine-year period around the offer, including
and the natural log of the book value of firm assets in
the offer year (designated year 0), the three-year period
year -1. We use a discrete rather than a continuous
prior to the offer year (years -1, -2, and -3), and the
variable for the market-to-book ratio to minimize the
five-year period following the offer year (years +1 to
effects of multicollinearity between the measures of
year +5). Changes in operating performance from prefirm size and growth opportunities. Among equity
to post-issue are measured relative to year -1.
issuers, we expect a negative coefficient for the marketFinally, we examine the robustness of these results
to-book dummy variable and a positive coefficient for
by regressing the changes in operating performance
firm size. Among debt issuers, we expect these
from pre- to post-issue against firm size and the market-
coefficients to be less important economically and of
to-book ratio of equity along with control variables
lower significance.
that have been shown to be related to post-issue
Table 2 presents summary statistics for the sample
operating performance in previous studies. The three
of
equity and debt issuers. These summary statistics
control variables we use are: the ratio of free cash flow to
show that, compared to debt issuers, the median equity
book value of assets, the run-up in operating performance
issuer is significantly smaller, has slightly lower
leverage, raises smaller amounts of capital, both in
prior to the issue, and the change in gross property, plant,
and equipment scaled by the book value of assets.
absolute amount and as a fraction of firm value.
Our measure of free cash flow is operating free cash
flow scaled by the book value of the firm's assets
where operating free cash flow is calculated as
III. Empirical Results Concerning
operating income plus deferred taxes minus total taxes
Changes in Operating Performance
minus interest expense and minus dividends paid to
preferred and to common stockholders. Lang and Our analysis takes part in three stages. First, we
compare the performance for the full sample of debt
Litzenberger (1989), Lehn and Poulsen (1989), and
and equity issuers. Next, we split the debt and equity
McLaughlin, Safieddine, and Vasudevan (1996) have used
a similar measure. We expect to find a negative subsamples based on measures of information
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36
FINANCIAL
Table
2.
MANAGEMENT
Summary
/
SUMMER
Statistics
1998
for
Firm
Equity
Median and mean values for selected variables for issues by industrial firms during the period 1980 to 1993. Firm values
are from the year prior to the offering unless otherwise noted. The sample includes 1,967 seasoned equity issues and 960
debt offerings. The equity issues are seasoned, firm commitment, underwritten public offerings. Best-efforts and unit
offerings are excluded, as are issues where equity is offered jointly with debt, preferred stock, or warrants. Sample debt
issues are non-convertible corporate bonds with a maturity of three years or more and a value of $30 million or more. No
more than one issue per year is included for any issuer. Pretax operating cash flow is defined as net sales, minus cost of
goods sold, minus selling and administrative expenses, but before deducting depreciation and amortization expense.
Industry-adjusted values subtract the industry median from the issuer value, where the industry median is calculated for
all Compustat firms with the same two-digit SIC code as the issuing firm. Match-adjusted values are calculated by
subtracting the value for a control portfolio from the issuing firm value. Proceeds are the dollar amount of the offering.
Leverage is measured as the book value of long-term debt divided by the sum of the book value of debt and the market value
of equity. The fraction of firms in distress is based on the number of firms with negative cash flow in the two years prior
to the offering. P-values for tests of the significance of the difference in medians are based on Wilcoxon signed-rank tests.
Seasoned Equity Seasoned Debt Test for Differences
Issuers Issuers between Equity and
Debt Issuers
Variables Median Mean Median Mean (p-Values)
Book Value ($MM) 118.43 912.20 211.52 497.42 0.000
Sales ($MM) 142.2 852.13 218.42 516.16 0.000
Cash Flow to Book Value 0.1487 0.1368 0.1508 0.1512 0.487
Industry-Adjusted Cash Flow to Book Value 0.0401 0.0336 0.0330 0.0344 0.023
Matched-Adjusted Cash Flow to Book Value 0.0006 0.0021 0.0005 0.0013 0.188
Cash Flow to Sales 0.1227 -0.0843 0.1389 0.1604 0.000
Industry-Adjusted Cash Flow to Sales 0.0350 -0.1755 0.0397 0.0596 0.017
Leverage Ratioa 0.1163 0.1558 0.1731 0.1981 0.000
Issue Value ($MM) 31.20 57.29 121.27 157.46 0.000
Realtive
Size
b
0.1270
0.1640
0.3308
0.5130
0.000
Fraction of Firms with Negative Cash Flows 0.0742 0.0052 0.000
in the Prior Two Years
aLeverage is measured as the book value of long-term debt divided by the sum of the book value of long-term debt a
market value of equity.
bRelative size is the gross proceeds scaled by the sum of the book value of long-term debt and the market value of equity
year prior to the offering.
asymmetry to examine the relationship between the
greater for firms that issue equity than
degree of information asymmetry and post-offer
performance changes. Finally, we use regression
for firms that issue debt.
analysis to control for other factors and compareHypothesis
the
3: Among issuers of the same security type,
effects of information asymmetries on changes in
the decline in operating performance
performance for debt and equity issuers.
should be greater for firms with greater
information asymmetries. The effect will
The discussion of information models yields
several hypotheses regarding the relationship
be more pronounced for firms issuing
between information asymmetry and ex-post operating
performance for firms raising capital.
riskier securities, such as equity.
A. Overall Operating Performance of Debt
Hypothesis 1: Firms that issue risky securities should, and Equity Issuers
on average, exhibit a decline in operating
performance following the offering.
Levels of unadjusted and match-adjusted cash-flow
return are shown for equity and debt issuers in Panels
Hypothesis 2: The performance decline should be A and B of Table 3. All median and mean unadjusted
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MCLAUGHLIN, SAFIEDDINE, & VASUDEVAN / INFORMATION CONTENT OF CORPORATE OFFERINGS 37
Table 3. Operating Performance and Changes in Operating Performance of Issuing Firms
around the Issue Year
Summary statistics for cash-flow-to-book-value ratios and for match-adjusted cash-flow-to-book-valu
years around the offering (from year -3 through year +5 relative to the year of issue) for 1,928 seasoned
942 non-convertible debt issuers. Sample issues are by industrial firms during the period 1980 to 1993 and
the Securities Data Company database. The equity issues are seasoned, firm commitment, underwritten p
Best-efforts and unit offerings are excluded, as are issues where equity is offered jointly with debt, pr
warrants. Sample debt issues involve non-convertible corporate bonds with a maturity of three years or m
of $30 million or more. No more than one issue per year is included for any issuer. Pretax operating cash
as net sales, minus cost of goods sold, minus selling and administrative expenses, but before deducting d
amortization expense. Match-adjusted performance subtracts the value for the issuer's reference portfolio
value, where the reference portfolio is formed using algorithms based on Barber and Lyon (1996). Pan
median, mean and standard deviation for the cash-flow-to-book-value ratios. Panel B reports the same st
match-adjusted cash-flow-to-book-value ratios. The statistics for changes in the match-adjusted cash-flo
ratios are reported in Panel C. P-values for tests of the significance of the differences between the debt a
are based on Wilcoxon signed-rank tests.
Panel A. Ratio of Cash Flow to Book Value for the Year Relative to the Issue Year
-3
-2
-1
Seasoned
0
+1
+2
Equity
+3
+4
+5
Issuers
Mean 0.134*** 0.130*** 0.140*** 0.137*** 0.118*** 0.110'** 0.106*** 0.105*** 0.110***
Median 0.147*** 0.145*** 0.149*** 0.145*** 0.134*** 0.128*** 0.124*** 0.119*** 0.120***
Std. Dev. 0.168 0.292 0.115 0.112 0.138 0.114 0.150 0.144 0.131
N 1,597 1,928 1,928 1,906 1,852 1,745 1,423 1,149 911
Seasoned Debt Issuers
Mean 0.157*** 0.154*** 0.151*** 0.134*** 0.133*** 0.133*** 0.134*** 0.135*** 0.129***
Median 0.155*** 0.154*** 0.151*** 0.133*** 0.133*** 0.134*** 0.135*** 0.138*** 0.134***
Std. Dev. 0.085 0.067 0.061 0.060 0.066 0.061 0.066 0.064 0.078
N
897
942
942
941
915
874
752
649
584
p-Values for (0.031) (0.022) (0.479) (0.000) (0.693) (0.065) (0.000) (0.000) (0.002)
Differences
Panel B. Matched-Adjusted Ratio of Cash Flow to Book Value for the Year Relative to the
-3
-2
-1
Seasoned
0
+1
+2
Equity
+3
+4
+5
Issuers
Mean -0.007 -0.007 0.004*** 0.013*** -0.002 -0.006 -0.013** -0.015*** -0.007*
Median -0.002 0.000 0.001*** 0.009*** 0.002 0.001 -0.004** -0.005*** -0.004
Std. Dev. 0.155 0.170 0.050 0.108 0.172 0.156 0.155 0.153 0.144
N 1,595 1,926 1,926 1,904 1,850 1,742 1,406 1,140 903
Seasoned Debt Issuers
Mean 0.003 0.006*** 0.004*** -0.008*** -0.007** -0.003 -0.003 0.000 -0.007
Median 0.002 0.003*** 0.001*** -0.006*** -0.003** -0.002 0.000 0.002 -0.003
Std. Dev. 0.085 0.063 0.036 0.059 0.071 0.086 0.080 0.079 0.096
N
895
941
941
939
913
871
716
604
508
p-Values for (0.402) (0.084) (0.431) (0.000) (0.018) (0.494) (0.395) (0.040) (0.539)
Differences
***Significant at the 0.01 level.
**Significant at the 0.05 level.
*Significant at the 0.10 level.
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38
FINANCIAL
MANAGEMENT
/
SUMMER
1998
Table 3. Operating Performance an
around the Issue Year (Continued)
Panel
C.
Change
in
the
Matched-Adjusted
-2 to -1 -1 to +1 -1 to +2 -1 to +3 -1 to +4 -1 to +5
Seasoned Equity Issuers
Mean 0.0108** -0.0059 -0.0102** -0.0177*** -0.0191*** -0.0104***
Median 0.0028** 0.0001 -0.0033** -0.0059*** -0.0088*** -0.0053***
N
1,926
1,850
1,742
1,406
1,140
903
Seasoned Debt Issuers
Mean -0.0015 -0.0110*** -0.0075** -0.0079 -0.0056 -0.0122**
Median -0.0005 -0.0060*** -0.0049** -0.0022 -0.0019 -0.0088**
N
941
913
871
716
604
508
p-Value for (0.062) (0.008) (0.415) (0.403) (0.078) (0.830)
Differences
***Significant at the 0.01 level.
**Significant at the 0.05 level.
cash-flow returns in Panel A are positive and
we report as compared to Loughran and Ritter (1997).
significant at the 0.01 level. However, the patterns
Second, we measure operating performance based on
across the nine-year interval around the offering areoperating cash flow, or earnings before interest, taxes,
and depreciation (EBITD), as scaled by the book value
different for equity and debt issuers.
The mean (median) cash-flow return for equityof assets. Loughran and Ritter (1997) add interest
income to the numerator. If firms have been saving
issuers is 13.4% (14.7%) in year -3 and increases to
14% (14.9%) in the year before the offering. The meancash to make investments following the SEO, including
(median) is 13.7% (14.5%) in the year of the issue.interest
income will tend to increase the cash flow to
Following the issue the mean declines to 10.6% (12.4%)book value ratios prior to and immediately following
in year +3 and is 11% (12%) in year +5. The run-up inthe SEO. Jain and Kini (1994) and McLaughlin,
Safieddine, and Vasudevan (1996), among others, have
operating performance from year -2 to -1 and
subsequent decline for equity issuers is similar to the recommended the measure of operating performance
pre-issue stock price run-up and post-issue decline we use in this paper, and Barber and Lyon (1996)
observed by Loughran and Ritter (1995). It is also recommend using EBITD scaled by assets to measure
similar to the operating performance run-up and post- operating performance.6
In contrast to equity issuers, debt issuers experience
issue decline reported by Loughran and Ritter (1997)
and McLaughlin, Safieddine, and Vasudevan (1996). a decrease in operating performance prior to the issue,
The cash-flow returns reported in Table 3 are slightly a sharp drop in year of issue, and little change in
different from the results reported in Loughran and operating performance in the post-issue period. Debt
Ritter (1997).5 The differences are likely due to twoissuers have a mean (median) unadjusted cash-flow
factors. First, the sample in Loughran and Ritter (1997) return of 15.7% (15.5%) in year -3. This declines
includes all SEOs as long as the issue has a primary sharply to 13.4% (13.3%) in the issue year, and remains
component. In contrast, our sample excludes SEOs with at nearly the same level through year +4. The mean
secondary components. The information effects
cash-flow return declines to 12.9% in year +5.
associated with insider selling of shares in a secondary Unadjusted cash-flow returns for equity and debt
offering could be quite different from the case where issuers are significantly different from each other in
the firm is raising funds by selling primary shares. years -3 and -2 and in years +2 through +5 with debt
Thus, excluding these offers from our sample could be issuers having better operating performance. The only
responsible for the difference in average performance year where equity issuers have superior operating
5Loughran and Ritter (1997) report for their subsample of 6There are also differences in the sample sizes and sample
primary equity offerings (Table V, Panel A) cash flow to book periods. The Loughran and Ritter (1997) sample of 1,338
value ratios of 15.6%, 15%, 15.4%, 14.8%, 13.9%, 12.4%,
SEO firms is taken from the period 1979-1989 whereas our
12.0%, and 11.8% in years -3, -2, -1, 0, +1, +2, +3, and +4
sample of 1,967 SEO firms is taken from the period 19801993.
respectively.
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MCLAUGHLIN, SAFIEDDINE, & VASUDEVAN / INFORMATION CONTENT OF CORPORATE OFFERINGS 39
performance is in year 0.
and -1 to +1 and better for debt issuers from -1 to +4.
Operating performance is typically better for equity
Panel B of Table 3 reports match-adjusted cashissuers relative to debt issuers at the time of the offering
flow returns. For equity issuers, mean match-
adjusted cash-flow returns are positive and
and somewhat worse in the longer term post-issue.
statistically significant in the year of issue and the Overall, the results in Panel C of Table 3 provide
year prior to it and negative in each year during the support for Hypothesis 1 and Hypothesis 2. Both
five-year post-issue period. The negative returnssecurities are issued during periods of relatively strong
are statistically significant in years +3, +4, and +5. For
operating performance and just prior to declines in
debt issuers, mean match-adjusted cash-flow returns performance. The post-issue operating performance
are negative in four of the five post-issue years,declines are usually greater for firms issuing the riskier
although they are statistically significant only in year
security, equity. If investors are pricing securities based
+1. Prior to the issue, debt issuers significantly on expected future cash flows, the results are
consistent with the announcement effects documented
outperformed their matching firms in years -2 and -1.7
Overall, when debt issuers are compared to equity
in previous studies that report significantly more
issuers, relative operating performance appears to be negative stock-price returns for firms issuing equity.
worse at the time of issue but better in the longer term.
The differences in match-adjusted cash-flow returns B. Information Asymmetries and Securities
between debt and equity issuers are significant at
Issues
customary levels in years -2, 0, +1, and +4. In years 0 In this section, we use measures of information
and +1, equity issuers exhibit superior operating asymmetry to analyze separately the relationship
performance, and in years -2 and +4, debt issuers
between the level of information asymmetry and
exhibit superior operating performance.
changes in operating performance for debt and equity
We formally examine Hypotheses 1 and 2 in Panel Cissuers. In information models such as Myers-Majluf
of Table 3. This panel reports changes in match- (1984), firms prefer to issue securities when they are
adjusted cash-flow returns over several intervals. Theovervalued. Overvaluation is potentially greater for
mean equity issuer has a statistically significant 1.08%
firms with a greater information asymmetry and for
increase in match-adjusted cash-flow return from year
junior securities, such as equity, whose value is more
-2 to year -1. In the longer term post-issue, these firms
sensitive to firm value. We use two proxies to measure
suffer significant and substantial declines in operatinginformation asymmetry: firm size and the ratio of market
performance. The mean changes in the match-adjusted
value to book value of equity.
cash-flow return are -1.02%, -1.77%, and -1.91% from Information asymmetry problems should be more
year -1 to years +2, +3, and +4, respectively. This decline
severe for smaller firms because fewer analysts follow
is greater than the run-up in operating performance them. Firm size has been used in prior research as a
from year -2 to -1. Operating performance recovers
proxy for information asymmetry (Opler and Titman,
slightly in year +5; the change from year -1 to +5 is 1995). Growth opportunities are also likely associated
less negative at -1.04%.
with information asymmetries. In general, managers of
Pre-issue, debt issuers have a statistically insignificant
firms with better growth opportunities will have better
mean decline of 0.15% in match-adjusted cash-flow returnknowledge than outsiders of their firm's menu of
from year -2 to -1. Mean operating performance declines
investment opportunities as well as better knowledge
significantly by 1.1%, 0.75%, and 1.22% from year -1 to
of the expected future cash flows from their firm's
years +1, +2, and +5, respectively. These post-issueexisting assets (Smith and Watts, 1992). The ratio of
declines in operating performance are consistent withmarket value to book value of equity captures the
the poor stock price performance of debt issuersMyers (1977) characterization of growth opportunities
documented by Spiess and Affleck-Graves (1996). The as the difference between firm value and the value of
changes from years -1 to +3 and -1 to +4 are not statisticallyexisting
assets. Collins and Kothari (1989) and
significant at customary levels. The differences in
Lewellen, Loderer, and Martin (1987) have used this
changes in match-adjusted cash-flow return between debt
ratio to proxy for growth opportunities. Collins and
and equity issuers are statistically significant for theKothari argue that the difference between the market
intervals -2 to -1, -1 to +1, and -1 to +4. The relative value and book value of equity roughly represents the
change is better for equity issuers for intervals -2 to -1
value of future investment opportunities available to
7Both equity and debt issuers performed better than their
industries during the entire period of the analysis. McLaughlin,
Safieddine, and Vasudevan (1996) and Patel, Emery, and Lee
(1993), using industry-adjusted operating performance as their
measures of abnormal performance, also find that equity issuers
outperformed their industries both pre- and post-issue.
the firm.8
8This measure is similar to Tobin's Q, which is defined as the
ratio of the market value of the firm to the replacement cost
of the firm's assets. Denis (1994) and Jung, Kim, and Stulz
(1996) have used variations of Tobin's Q to proxy for the
firm's growth opportunities.
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40
FINANCIAL
MANAGEMENT
/
SUMMER
1998
There are limitations
to
the
two
informa
a sample of
93 large
firms listed
on the NYSE
for which
however. First, it is
analysts'
important
forecasts are available. Based
to
on ourrecogn
results,
the informationwidely
asymmetry problems
would be least
these measures, though
used,
are
proxies for the degree
ofandinformation
for this group of firms
thus, their finding that there
Second, these two
is nomeasures
change in earnings following
are
the offering
not
is
in
smaller firms generally
tend
to be
grow
consistent with the
findings reported
here.
have higher market-to-book
Asymmetric information problems
ratios.9
and overvaluation
Our results show a difference between the
should be less severe when the firm is issuing a more
announcement-period effects for issuing
seniorfirms
security, such as debt. Panel A of Table 4 also
documented in prior research and thereports
long-run
match-adjusted cash-flow return for debt
operating performance effects examined issuers,
here. Inwith
his the sample divided according to the
median
book
value of assets for debt issuers. Similar
examination of announcement-period effects
for
SEO
firms, Denis (1994) finds no relationship between
to the results
stockfor equity issuers, smaller debt issuers,
price changes and his measures of growth opportunities,
firms with below-median book value, have statistically
the market-to-book ratio of equity and R&D
significant
investment.
declines in performance from pre- to post-
In contrast, using long-run measures, we find
a significant
issue
in all five periods shown. For the larger debt
the change in match-adjusted cash-flow
relationship between our information issuers,
asymmetry
is significant
at customary levels only
proxies and post-issue firm performance.returns
Further,
the
effect is more pronounced for equity issuers.
immediately around the offer (from -1 to + 1) and that
Table 4 reports changes in match-adjusted
change
cash-flow
is significantly less negative than the change
returns for subsamples of issuing firms
for smaller
divided
firms. Thus, for both equity and debt
according to the book value of assets (Panel
issuers,A)
smaller
and firms, firms likely to have greater
for issuer subsamples divided according to information
the marketasymmetries, have significantly negative
to-book ratio of equity (Panel B). In Panel
performance
A, smaller
changes pre- to post-issue. The changes
equity issuers, firms with a book value of
for
assets
larger firms
less are either not statistically different from
than the equity sample median, have statistically
zero or are significantly less negative than the changes
for smaller
firms. However, in contrast to the results
significant performance changes in each
of the
intervals shown. The pre-issue change from
year issuers,
-2 to differences in performance changes
for equity
between
larger and smaller debt issuers are significant
-1 is 1.76%. For these smaller equity issuers,
all changes
in match-adjusted cash-flow return for
for intervals
only some of the pre- to post-issue intervals (-1 to
ending post-issue are negative and statistically
+1, -1 to +3, and -1 to +5). Thus, there is some evidence
significant. For example, equity issuers with bookthat information asymmetry is more important for the
values less than the median have a significant 2.99%riskier security, equity.
decline in performance from year -1 to year +3. In Panel B of Table 4 reports results for subsamples of
contrast, for above-median-book-value equity issuers, issuers divided according to the market-to-book ratio
the larger firms, performance changes are not of equity. Similar to the results based on firm size in
statistically significantly different from zero in any ofPanel A, equity-issuing firms with high market-to-book
the intervals, pre-issue or pre- to post-issue. Thus,ratios, firms likely to have greater information
smaller equity issuers, firms likely to have greaterasymmetries, have positive pre-offer run-up (+1.33%,
information asymmetries, have more negative changessignificant at the 0.10 level) and significantly negative
in pre- to post-issue operating performance. The pre- to post-issue declines in performance. For example,
differences in operating performance changes
equity issuers with market-to-book ratios above the
between the smaller and larger equity issuers are median have a significant 2.97% decline in the matchstatistically significant for all five post-issue periods. adjusted cash-flow return from year -1 to year +3. In
Loughran and Ritter (1997) and McLaughlin,
contrast, equity issuers with market-to-book ratios
Safieddine, and Vasudevan (1996) report similarbelow the median, lower information asymmetry firms,
evidence for their samples of equity issuers.
have performance changes that are not statistically
These results suggest a possible explanation for the
significantly different from zero for any of the intervals
shown in Panel B of Table 4. The differences in
contrast between our results and those of Healy and
Palepu (1990), who find no change in earnings for their
performance changes between the two groups ar
sample of equity issuers. Healy and Palepu (1990) use
significant at the 0.05 level for periods -1 to +2, -1
+3, and -1 to +4. Equity issuers likely to have greate
9We also find significant differences between exchange-listed
information asymmetries, high-market-to-book-rati
and non-exchange-listed issuers, with the exchange-listed firms
firms, have significantly worse performance change
exhibiting better performance. However, these differences are
pretothe
post-issue over most of the intervals tested.
not statistically significant if we control for firm size
and
market-to-book ratio.
Panel B of Table 4 also reports results for debt-issue
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MCLAUGHLIN, SAFIEDDINE, & VASUDEVAN / INFORMATION CONTENT OF CORPORATE OFFERINGS 41
Table 4. Changes in Operating Performance for Issuing Firms Divided According to the
Book Value of Assets and According to the Market-to-Book Ratio
Mean match-adjusted changes in cash flow to book value ratios for periods from year -2 to year +5 relative to the offe
for 1,928 seasoned equity issuers and 942 non-convertible debt issuers. Sample issues are by industrial firms during t
period 1980 to 1993 and are taken from the Securities Data Company database. Equity issues are seasoned, firm commitment
underwritten public offerings. Best-efforts and unit offerings are excluded, as are issues where equity is offered join
with debt, preferred stock, or warrants. Sample debt issues invovled non-convertible corporate bonds with a maturity
three years or more and a value of $30 million or more. Not more than one issue per year is included for any issuer. Pr
operating cash flow is defined as net sales, minus cost of goods sold, minus selling and administrative expenses, but bef
deducting depreciation and amortization expense. Match-adjusted performance subtracts the value for the issuer's refer
portfolio from the firm value, where the reference portfolio is formed using algorithms based on Barber and Lyon (19
Significance tests are based on Wilcoxon signed-rank tests. Panel A reports results for firms divided based on the bo
value of firm assets in the year before the offer. Panel B reports results for firms divided based on the market-to-book r
of firm equity in the year before the offering.
Panel A. Mean Changes for Issuers Divided by the Book Value of Firm Assets in the Year Prior to the Issue
Matched-Adjusted-Cash-Flow-to-Book-Value Ratio from Year i to Year j
-2 to -1 -1 to +1 -1 to +2 -1 to +3 -1 to +4 -1 to +5
Seasoned Equity Issuers
< Median Book Value 0.0176* -0.0109 -0.0223*** -0.0299*** -0.0317*** -0.0206***
> Median Book Value 0.0040 -0.0010 0.0012 -0.0060 -0.0065 0.0001
p-Values for Differences (0.523) (0.080) (0.004) (0.031) (0.015) (0.055)
Seasoned Debt Issuers
< Median Book Value -0.0030 -0.0156*** -0.0106*** -0.0152** -0.0088* -0.0209***
> Median Book Value 0.0000 -0.0066** -0.0045 -0.0014 -0.0030 -0.0037
p-Values for Differences (0.572) (0.042) (0.177) (0.080) (0.171) (0.041)
Panel B. Mean Changes for Issuers Divided Based on the Ratio of Market to Book Value
Issue
Matched-Adjusted-Cash-Flow-to-Book-Value Ratio from Year i to Year j
-2 to -1 -1 to +1 -1 to +2 -1 to +3 -1 to +4 -1 to +5
Seasoned Equity Issuers
< Median Book Value 0.0067 0.0019 0.0024 -0.0064 -0.0054 -0.0046
> Median Book Value 0.0133* -0.0162 -0.0249** -0.0297*** -0.0348*** -0.0175**
p-Values for Differences (0.186) (0.362) (0.007) (0.025) (0.005) (0.302)
Seasoned Debt Issuers
< Median Book Value -0.0027 -0.0102*** -0.0085* -0.0095* -0.0060 -0.0125
> Median Book Value -0.0007 -0.0132*** -0.0076*** -0.0077 -0.0053 -0.0117
p-Values for Differences (0.497) (0.386) (0.727) (0.571) (0.969) (0.889)
***Significant at the 0.01 level.
**Significant at the 0.05 level.
*Significant at the 0.10 level.
from zero as forratio
above median
subsamples based on the market-to-book
of
issuers. In contrast to
for issuers,
equity issuers, the differences between
equity for debt issuers. In contrastthe
toresults
equity
the market-to-book ratio does not
aboveappear
and below-median
to be a groups are not significant
at conventional
for any of the periods tested.
significant indicator of performance
for debt levels
issuers.
The results
in this section are consistent with the
In contrast to the predicted result,
performance
information
models
of the
decision to issue securities.
changes for debt issuers with market-to-book
ratios
Overall, both different
debt and equity issuers exhibit a decline
below the median are as often significantly
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42
FINANCIAL
in
MANAGEMENT
operating
/
SUMMER
1998
performance
at customary levels.following
The results for equity issuers
the
with
o
issue securities during
periods
of
rela
the same dependent
variable are reported
in column
2.
operating performance
Only the coefficient
and
of the run-up
just
variable,prior
the change
that performance,
fromand
year -2 tothe
-1 in the match-adjusted
performanc
cash-flow
greater for firms return,
issuing
riskier
sec
is significant the
at customary
levels. Thus, equity
When the sample is
issuers
divided
that have greater improvements
according
in performance
to
of information asymmetry,
prior to the offering alsoeffects
have significantly assoc
greater
level of information
asymmetry
are
p
declines post-issue.
For performance changes from
-1
general, firms with
to +1, there
greater
are no significant differences
degrees
between the of
asymmetry (small estimated
firms
and
firms
with
coefficients
for debt
and equity issuers.
to-book ratios) exhibit
negative
Column 4 reports more
estimation results
for debt issuers
performance, and for
the
differences
per
performance
changes from year -1 in
to +2. The
more significant for
coefficient
firms
for the pre-issue
that
free cash
issue
flow variablejun
is
negative (-0.051) and
significant at the 0.10 level. Firms
equity. All significant
performance
d
equity
issuers
asymmetries,
to-book
are
for
with greater
firms
free cash flow that
with
raise additional
greate
capital
by issuing
debt have and
greater declines
in performance
smaller
firms
firms
with
ratios.
than debt issuers with little free cash flow.
This result
Performance
changes
issuers with lower suggests
information
that the bonding effects of asymmet
a debt issue may
not be in effect
for issuers with
financial slack.
The
significantly different
from
zero.
Results
for
debt
issuers. coefficient
Although
firm
size
for the change in
property, plant,
and
operating performance
changes
for
debt
equipment from
year -1 to +2 is negative
(-0.016)
and
difference between
larger
smaller
significant
at the 0.01and
level indicating,
surprisingly, d
significant only for
that debt
some
issuers with
of
higher
the
levels oftest
investmentinte
have
no
significant
greater declines in operating
performance over the
difference
between
hi
information-asymmetry
interval. This result
debt
also does not
issuers
offer support for
whe
the
to-book ratio is used
view that
as
debtthe
is a contract
asymmetry
that instills discipline in
the
degree
of
information
managers and forces
asymmetry
them to accept positive-netapp
present-value
projects (Jensen,
1986).
more for equity, the
riskier
security,
wh
security more difficult
Results for equity
to issuers
value.
with performance changes
measured over the same interval are reported in column
5. The coefficient for the
run-up Changes
variable is negative (C. Regression Analysis
of
0.189)
and
significant
at
the
0.01
level.
The coefficient
Operating Performance
for the change in gross property, plant, and equipment
In
this
section,
asymmetry
that
have
weis examine
effects
positive (0.014) and the
significant
at the 0.05 levelof
while
been
indicating
that equity issuers that
invest after
the issue
controlling
for
some
o
perform better.
The coefficients
for these two variables
shown
to
be associated
are significantly different
debt and equity
issuersr
following
thefor
issue.
We
the 0.01 level. Consistent returns
with the predictions of
the
match-adjusted at
cash-flow
aga
models, the coefficient
of the
market-toof free cash flowinformation
to book
value
of
asse
book ratioperformance,
dummy is negative (-0.019) and significant
run-up in operating
cha
at
the
0.05
The coefficient of firm size
is positive
property, plant, and level.
equipment
scaled
(0.005) and significant
at the 0.10 level. Thus,
amongth
value of assets, a dummy
variable
for
equity
issuers,
high-information-asymmetry
firms
have
market to book value of equity, and the
greater
declines
in
performance
following
the
offering.
the book value of firm assets. Table 5
in
performance
in
although the effects
associated with
the
estimates of this However,
regression
model
for
market-to-book
ratiotheory
variables are significantly
post-issue periods.
Since
pred
different for
debt and
equity issuers, there is no
relationship between
the
independent
difference
in the effect of firm size.
operating
performance
will
Regression estimates for the operating performance
equity and debt issuers, we estimate separate
change from year -1 to +3 as the dependent variable
regressions for equity and debt issuers and test for
differences between the estimated coefficients.
are reported in column 7 for debt issuers. Similar to the
changes
in
regression results, the coefficient of the
Column 1 reports results for debt issuers whereprevious
the
change in gross property, plant, and equipment is
dependent variable is the change in the match-adjusted
(-0.010) and significant at the 0.01 level. The
cash-flow return from year -1 to +1. None ofnegative
the
coefficient
of firm size is positive (0.004, significant at
coefficients for the independent variables is significant
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be
MCLAUGHLIN, SAFIEDDINE, & VASUDEVAN I INFORMATION CONTENT OF CORPORATE OFFERINGS 43
Table 5. Estimates of Regressions Relating Changes in Operating Performance to Firm Va
for Firms Issuing Seasoned Equity or Non-Convertible Debt During the Period 1980-1993
Regression estimates are for 1,928 industrial firms issuing seasoned equity and 942 industrial firms issuing non-
debt during the period 1980 to 1993. Issues are taken from the Securities Data Company database. Equity
seasoned, firm commitment, underwritten public offerings, excluding best-efforts, unit offerings, and issues w
is offered jointly with other securities. Debt issues involve non-convertible corporate bonds with a maturity of
more and a value of $30 million or more. Not more than one issue per year is included for any issuer. The
variables are the change from year -1 to year j in issuer match-adjusted cash flow return where cash flow retur
operating cash flow divided by firm book value and match-adjusted cash flow return subtracts the value for t
reference portfolio from the firm value. The reference portfolio is formed using algorithms based on Barber
(1996). Independent variables are: free cash flow scaled by book value of assets in year -2, the change from year
+j in gross property, plant, and equipment scaled by the book value of assets in year -1, the change in the fir
adjusted cash return from year -2 to year -1, a dummy variable taking the value 1 for firms with market-to-bo
equity greater than their sample medians, and the natural log of the book value of the firm's assets in year -1.
are in parentheses.)
Change from Year -1 to Year Charge from Year -1 to Year +2 Charge from Year-1 to Yea
+1 in IVBtched-Acused Cash in Matched-Acusted Cash Flow in Matched-A4usied Cash
Flow Return Retutn Return
Test
for
Test
HO:
Debt
for
Ho:
EquLity
Test
for
HO:
Equity
Issuers Issuers Debt Issuers Issuers Debt Issuers Issuers Debt
Intercept -0.022 -0.007 0.39 -0.010 -0.033 -0.74 -0.042 -0.063 -0.55
(-1.51) (-0.31) (-0.64) (-1.91)* (-2.21)** (-3.00)***
Ratio of Free Cash Flow to -0.035 0.003 0.59 -0.051 -0.002 0.95 -0.012 -0.024 -0.20
Book Value of Assets in (-1.33) (0.10) (-1.77)* (-0.11) (-0.35) (-0.91)
Year -2
Change fan Year -2 to Year -0.049 -0.098 -0.43 -0.001 -0.189 -2.01** -0.081 -0.118 -0.34
-1 in the Mtched-Adjusted (-1.06) (-233)** (-0.13) (-520)*** (-1.33) (-2.63)***
Cash Flow Return
Change from Year -1 to -0.006 0.009 0.87 -0.016 0.014 -289*** -0.010 0.022 4.02***
Yearj in Gross Property, (-0.94) (0.90) (-2.87)*** (253)** (-2.60)*** (4.07)***
Plant, and Equipmert
Divided by the Book Value
of Assets in Year -1
Dunmy Variable for 0.003 -0.007 -0.69 0.003 -0.019 -1.97** 0.010 -0.020 -2.17**
Market-to-Book Ratio of (0.65) (-0.62) (0.62) (-2.27)** (1.62) (-1.93)*
Equity Greater than Sample
NMdian in Year -1
Natural Log ofthe Book 0.001 0.001 -0.02 0.000 0.005 1.19 0.004 0.007 0.66
Value of Firm Assets in (0.77) (0.35) (0.25) (1.94)* (1.80)* (2-26)**
Year -1
N
694
1,298
669
1,236
559
1,026
Adjusted R2 0.001 0.002 0.013 0.034 0.021 0.029
F 1.06 1.38 0.76 2.71** 9.75*** 3.45*** 3.44*** 7.13*** 3.44***
***Significant at the 0.01 level.
**Significant at the 0.05 level.
*Significant at the 0.10 level.
the 0.10 level) indicating that larger
firms
smaller in gross propert
for
the have
investment
declines in performance followingequipment
the offering.
(both significant at the 0
Results for the same dependent variable
for equity
coefficients
for investment in gross pr
issuers are reported in column 8. Consistent
with
our
and equipment
are
significantly differen
debt issuers.
The coefficient
for the mark
earlier results, we find a negative coefficient
(-0.118)
for
the run-up variable and a positive
(0.022) coefficient
is negative
(-0.020, significant at the 0.1
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44
FINANCIAL
coefficient
the
0.05
MANAGEMENT
of
/
SUMMER
1998
firmthat
size
the decline
iswill
positive
be greater for more
(0.007,
junior securit
level).
As Within
with
the
re
debt and
equityprevious
issuers, the model predi
coefficients for the
ratio
that market-to-book
the decline will be greater for firms with
grea
significantly different
information
for
asymmetries.
debt
Our and
empiricalequit
results of
the coefficients for support
firm
size
are
not. 10
for all
of these
predictions.
We draw several conclusions from these results.
Both debt and equity issuers exhibit declines
First, among equity issuers, smaller firms and operating
firms
performance from pre- to post-issue. Over
with high market-to-book ratios exhibit greater declines
debt issuers have less negative performance chan
in performance following the offering. These effects
than equity issuers. Using two information asymmet
are less important or insignificant for debt issuers.
proxies, we find that equity issuers with great
information asymmetries exhibit substantial
Second, equity issuers that invest the issue
proceeds in property, plant, and equipment exhibit
performance declines, while equity issuers with smaller
greater improvements in operating performance. This
information asymmetries do not exhibit a significant
is consistent with the findings of McLaughlin,
post-issue change in performance. Among debt issuers,
Safieddine, and Vasudevan (1996). In contrast, debt the distinctions based on firm size and market-to-book
issuers that invest more in property, plant, and ratio are less significant. We also examine information
equipment exhibit greater declines in operating effects while controlling for other factors associated
performance following the offering. Third, equity with performance changes following the offering.
issuers that exhibit greater improvements in
Among equity issuers, firms with high market-to-book
operating performance prior to the offering alsoratios and smaller size exhibit greater declines in
exhibit greater declines following the offering. This performance following the offering. These information
result is also consistent with McLaughlin, Safieddine, measures are less important for debt issuers. For the
and Vasudevan (1996). We do not find such a
non-information factors, equity issuers that invest in
relationship for debt issuers. Finally, we do not find
a
property,
plant, and equipment exhibit greater
significant relationship between free cash flowimprovements
and
in operating performance. In contrast,
post-issue operating performance for either debt
or issuers that invest in property, plant, and
debt
equity issuers."
equipment exhibit greater declines in operating
performance following the offering. Equity issuers that
IV. Conclusions
exhibit greater improvements in operating performance
prior to the issue also exhibit greater pre- to post-issue
performance
declines. We do not find any such
This paper examines the information content
of
relationship
announcements of corporate securities offerings
byfor debt issuers. Finally, we do not find a
significant
analyzing firm operating performance around
equity relationship between free cash flow and
operating performance for either debt or
and debt issues. Information models, such post-issue
as Myersequity issuers.
Majluf (1984), suggest that operating performance
will Overall, our results offer support for
decline for issuers of all types of risky securities
and
information models of securities issues. n
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