Is the Market Optimistic about the Future Earnings of Seasoned Equity Offering Firms?

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Abstract
The leading explanation for the post-issue long-run stock return underperformance of seasoned equity offering firms is that investors have optimistic expectations regarding future earnings and the underperformance occurs as these expectations are corrected over time. To directly test this hypothesis, we examine investors' reaction to quarterly earnings announcements over a five-year period following the offering for a large sample of seasoned equity issuing firms. In general, our evidence suggests that investors are not disappointed by earnings announcements that follow seasoned equity offerings. This result is not sensitive to widening the window over which earnings announcement returns are computed. This result also holds true for subsets of equity issuing firms classified as glamour issuing firms, Nasdaq listed issuing firms, and hot market issuing firms. The choice of these three subsets is predicated by extant evidence that these firms are likely to convey relatively more unfavorable information through their earnings announcements. Overall, our findings are inconsistent with the optimistic expectations hypothesis.

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