Stock Returns and Operating Performance of Securities Issuers

We examine long-run stock returns and operating performance around firms' offerings of common stock, convertible debt, and straight debt from 1985 to 1990. We find that pre-issue abnormal returns are positive and significant for stock issuers, but not for convertible and straight debt issuers. The post-issue mean returns show that common stock and convertible debt issuers experience underperformance during the post-issue periods, but straight debt issuers do not. Consistent with these results, common stock issuers experience the best pre-issue operating performance among all three types of issuers, and operating performance declines during the post-issue periods for common stock and convertible debt issuers. Using a new approach in linear model estimations to correct heteroskedasticity and to adjust for finite sample, we find a positive relation between post-issue operating performance and issue-period stock price reactions. The results suggest that future operating performance is anticipated at the issue and that securities issues provide information on issuers' future performance. The Southern Finance Association and the Southwestern Finance Association.