The Market Reaction to Canceled Equity Offerings

Abstract

Investors appear to respond to both an investment‐opportunity signal and a valuation signal when an equity offering is announced or canceled. While prices fall in response to equity offers and rise when offers are withdrawn, the price changes are greater for offers used to reduce debt than for offers used for capital expenditures. Consistent with asymmetry theory, offerings and withdrawals of convertible debt and utility stock cause less price change when compared to industrial stock offers. Finally, the reaction to cancellations made because of market conditions, indicating undervaluation, are similar to the reaction to cancellations made for other reasons.

Market Reaction to the Withdrawal of Private Investments in Public Equity

“…Office and Smith, Mikkelson and Partch, Jensen and Pugh find that when the management announces the withdrawal of equity offering (common stock and convertible debt), the firm is typically met with significantly positive market reaction ( [1], [2], [3]). They argue that the management chooses to issue equity when the firm's shares are overvalued and decides to cancel the offering when the shares are no longer overvalued.…”

Stock price performance of seasoned equity offerings: completed vs withdrawn

“…We retrieve firm characteristics and SIC codes from COMPUSTAT and daily returns from Datastream. Consistent with Mikkelson and Partch (1986, 1988) and Jensen and Pugh (1995) we remove all american depository receipts (ADR), Unit, Debt, 144A shelf registration, private placements and american depository shares (ADS) as well as utilities, banks and non‐banking financial institutions. Firms taking 600 days or more to complete or withdraw an SEO are also excluded.…”

“…This time period has also been the main focus of most of the empirical work on equity offers (see e.g. Mikkelson and Partch, 1986, 1988 Jensen and Pugh, 1995; and Phelps and Kremer, 1992). These studies find a positive average CAR for completed offerings and a negative average CAR for withdrawn offerings during the decision period.…”