Seasoned Equity Offerings, Operating Performance and Overconfidence Evidence From The UK

Journal of Economics and Business 61 (2009) 189–215
Contents lists available at ScienceDirect
Journal of Economics and Business
Seasoned equity offerings, operating performance and

overconfidence: Evidence from the UK
Panagiotis Andrikopoulos ∗
Department of Accounting and Finance, Faculty of Business and Law, De Montfort University,
The Gateway, Leicester LE1 9BH, United Kingdom
a r t i c l e i n f o a b s t r a c t
Article history: Prior research on seasoned equity offerings in UK shows that equity
Received 4 October 2007 issuers report a significant long-term underperformance in the
Received in revised form 12 September
period following the event. However, the factors contributing to
2008
such underperformance are not yet fully explored. Using a sample
Accepted 15 September 2008
of rights issues for the period 1988–1998, this study suggest that
the long-term underperformance is significantly related to a dete-
Keywords:
rioration of companies’ operating fundamentals in the post-offering
Rights issues
Seasoned equity offerings period. Further comparison between “Best” and “Worst” post-issue
Long-term performance performers reveals that long-term underperformance is predomi-
Operating performance nantly robust in the case of fastgrowing firms with over-optimistic
Managerial overconfidence management. This evidence is consistent with the managerial over-
confidence and “empire-building” hypotheses.
© 2008 Elsevier Inc. All rights reserved.
1. Introduction
Prior studies on seasoned equity offerings (SEO) in the US and the UK have unanimously reported
an economically and statistically significant market underperformance for a period of up to 5 years
following the equity issuance event. These results are found to be robust after controlling for vari-
ous micro-characteristics such as companies’ size, industrial classification and book-to-market ratios
(B/M). This study extends current knowledge on UK SEOs by examining the link between post-event
long-term underperformance and operating performance. Therefore, the contribution of this paper is
twofold. Firstly, this study provides robust evidence that the post-issue long-term underperformance
is associated with a consistent deterioration in the profitability of the issuer subsequent to the event.
∗ Tel.: +44 116 257 7218; fax: +44 116 251 7548.
E-mail address: pandrikopoulos@dmu.ac.uk.
0148-6195/$ – see front matter © 2008 Elsevier Inc. All rights reserved.
doi:10.1016/j.jeconbus.2008.09.002
190 P. Andrikopoulos / Journal of Economics and Business 61 (2009) 189–215
For example, compared to the median operating performance of various matching-portfolios based on
industry-, momentum-, size- and B/M indicators, equity issuers report an economically and statisti-
cally significant deterioration in profitability as measured by the Return on Assets (ROA) and Net Profit
Margin indicators, for the entire period of 36 months following the event.
The worst performance differential for equity issuers is reported against the B/M matching-
portfolios with SEO companies’ median ROA and Net Profit Margin indicators deteriorating from −6.58%
and −22.86% at the time of issue to −9.56% and −37.17% 3 years after the event. In addition, the investi-
gation of earnings-generating ability of equity issuers measured by the growth in Turnover and Earnings
Before Tax revealed that, on average, (a) issuers generate maximum turnover for the first 2 years fol-
lowing the offering at the expense of profitability and (b) they eventually suffer exhaustion leading
to a slowdown of their sales revenues approximately 3-year after the issue. A further investigation
into the relationship between the Fixed Assets growth indicator and the ROA performance of issuers in
the post-event period suggests that the deterioration in the operating performance is caused by the
potential existence of managerial hubris and ‘empire-building’ biases on behalf of the issuers.
Secondly, most empirical research on SEOs in the US and the UK has reported an aggregate picture
of market deterioration for equity issues; hence, it has underestimated those cases where compa-
nies proved to be successful in effectively allocating issued funds while investors enjoyed post-issue
superior returns. Given that 15.2% of cases from the total sample of 1542 rights issues examined are
associated with companies that consistently report positive abnormal returns in the post-issue period,
this study argues that the post-event deterioration of operating performance is asymmetric between
post-winning and post-losing companies. To address this question, the study classifies issuers into two
clusters based on extreme ‘Best’ and ‘Worst’ post-issue stock market performance. The results revealed
a significant difference between the two clusters in both economic and statistical terms. In contrast to
the post-issue under-performing cluster, market out-performers exhibit a continuous positive growth
in earnings compared to their industries, a steady improvement in the ROA measure following the
offering and a positive and steady excess growth in their assets. These results corroborate Loughran
and Ritter’s (1997) argument that fast-growing companies in terms of operating performance are
predominantly those that report the lowest subsequent stock market returns.
The remainder of this paper is organised as follows. The next section summarises the key theo-
retical arguments and the relevant empirical evidence concerning equity issuance and stock market
performance prior to and post the event. Section 3 describes the data sources and the methodology
used. Section 4 examines the post-event performance of equity issuers compared to the median perfor-
mance of the corresponding industry, momentum, size and B/M matching-portfolios. The relationship
between post-issue market performance and operating performance is examined in Section 5. Finally,
this paper concludes in Section 6 with a summary of the main findings.
2. Theoretical background and empirical evidence
Seasoned equity offerings (SEO) represent one of the most important sources for publicly listed
companies to raise additional capital either from existing shareholders or from new investors. Since
1998, UK SEOs have generated a total economic value of £70.357 billion compared to £42.710 billion
for new listings (IPOs); this equates to an annual average of 63% of all capital raised annually by UK
listed firms.
In contrast to the US, where most SEOs are conducted through the use of cash offers, UK companies
in past decades predominantly1 raised new equity by making rights issues (Armitage, 1998; Levis,
1995; Marsh, 1979; Slovin, Sushka, & Lai, 2000). This method allows companies to protect existing
1
The other two methods of issuing equity are the use of open offers or placings or a combination of both. Since the mid-1990s
there has been a considerable increase in the use of open offers as a means to raise additional capital. Compared to rights issues,
open offers do not contain negotiable documents such as a renounceable letter that can be sold by existing shareholders to
outsiders. By requirement of the London Stock Exchange if companies decide to use an open offer, new equity should be offered
to existing shareholders in a form of invitation with maximum discount of ten percent on the current market price and for a
maximum period of 15 days. After that period, all outstanding shares can be offered to outside investors.
P. Andrikopoulos / Journal of Economics and Business 61 (2009) 189–215 191
shareholders by avoiding the potential dilution of their wealth and loss of control following an equity
issue.
In line with other corporate events, issuing new equity represents a decisive market signal regard-
ing a company’s future potential and management’s ability. Irrespective of the underlying motives,
Bayesian investors should immediately adjust their individual beliefs and valuations to reflect this
new set of information and prices should immediately move to a new equilibrium level. Therefore,
under the informational efficiency paradigm, securities’ prices for companies engaging in SEO activity
should, on average, adjust gradually with all necessary revaluations being completed no later than
the end of the relevant announcement period. Having reached a new equilibrium, the post-SEO stock
performance of such companies should again perform on average no better or worse than the rest of
the market.
Previous work on the long-term performance of SEOs mainly based on US and UK market data has
revealed a different story. According to Table 1, since the mid-1990s when the first comprehensive
studies on the subject were published, empirical evidence unanimously supports the existence of
an economically significant long-term underperformance following SEOs. What makes this evidence
more interesting is that careful examination of price performance before and after an SEO reveals a
consistent mispricing pattern, with companies issuing equity outperforming on average the relevant
benchmarks followed by a statistically significant mean reversion during the announcement period
and a persistent long-term underperformance after the event.2
The evidence regarding the continuous under-performance in the post-issue period casts seri-
ous doubts on the degree to which the market is informationally efficient. For example, one way of
interpreting the continuous long-term underperformance is the existence of overpriced securities
prior to, during and after the period of the equity issuance combined with sub-optimal investment
decision-making where investors persistently under-react to such news. If such a case exists, invest-
ment strategies such as short selling of issuers’ equity will ultimately lead to above average returns.
Despite this unanimous agreement on the existence of this effect, its cause is still under debate. The
first explanation supports the under-reaction hypothesis. If prior to the rights issue, both managers and
investors are highly overoptimistic with regards to companies’ future performance, pre-SEO securities
will tend to be overpriced. This period of optimism creates a window of opportunity for managers to
announce the rights issue and exploit the obvious overvaluation. The immediate fall in stock prices
at the beginning of the announcement period reported in earlier studies (Choe, Masulis, & Nanda,
1993; Eckbo & Masulis, 1995; Levis, 1995; Slovin et al., 2000) is explained by the adverse selection
model developed by Myers and Majluf (1984). So, with the announcement of the issue, market prices
should fall back to their intrinsic level as investors will perceive this event as a signal of overvaluation.
However, a persistent price decrease even many months after the event could be perceived as a sign
of continuous under-reaction on behalf of investors and a violation of market efficiency.
A seminal study of the possible market under-reaction to SEOs and the long-term underperformance
of companies following seasoned equity issues in the US was conducted by Loughran and Ritter (1995).
Using a sample of 3702 seasoned equity offerings covering the period from 1970 to 1990, Loughran
and Ritter reported an underperformance of 8% annually in average compounding terms for firms
conducting SEOs compared to non-issuing firms of similar size. As the authors concluded (Loughran
& Ritter, 1995, p. 46) “. . .the poor performance of firms conducting SEOs is not a manifestation of
long-term return reversals, nor is it attributed to differences in betas. . . our evidence is consistent
with a market where firms take advantage of transitory windows of opportunity by issuing equity
when, on average, they are substantially overvalued”. These results were later confirmed by Spiess and
Affleck-Graves (1995). Using a sample of 1247 firms making rights issues over the period 1975–1989,
the authors reported an average annualised buy-and-hold abnormal loss of 6.1% 5 years after the
SEO.
The second explanation is based on Fama’s (1998) ‘equiprobability’ and ‘bad-model’ arguments.
As Fama (1998, p. 284) argues, the observed long-term under-reaction and overreaction phenomena
2
For example, Spiess and Affleck-Graves (1995), Loughran and Ritter (1995), Kothari and Warner (1997), Barber and Lyon
(1997), Loughran and Ritter (2000), Jegadeesh (2000), Abhyankar and Ho (2002) and Ngatuni et al. (2007).
192
Table 1
Summary of findings of prior studies on seasoned equity offerings in the US and UK.
Study Date Methodology Sample Pre-SEO Post-SEO
Period n EW VW EW VW
US data
−9.10%
P. Andrikopoulos / Journal of Economics and Business 61 (2009) 189–215

Loughran and Ritter 1995 BH/a/s 1970–1990 3702 72.3% – –
Spiess and Affleck-Graves 1995 BH/si 1975–1989 1247 – – −6.10% –
Loughran and Ritter 2000 CTAR/3FF 1973–1996 6461 – – −5.64% −3.84%
Brav, Geczy, and Gompers 2000 BH/sb 1975–1992 3775 – – −3.90% −3.40%
Eckbo, Masulis and Norli 2000 BH/sb 1964–1995 3315 – – −4.80% −2.20%
–//– –//– CTAR/3FF –//– –//– – – −1.44% −2.04%
Jegadeesh 2000 BH/sb 1970–1993 2992 – – −4.90% –
–//– –//– CTAR/3FF –//– –//– – – −5.40% –
–//– –//– CTAR/4FM –//– –//– – – −3.72% –
Mitchell and Stafford 2000 BH/sb 1961–1993 4439 17.35% −0.55% −2.70% −1.10%
–//– –//– CTAR/3FF –//– –//– 15.36% 2.25% −3.96% −0.36%
UK data
Levis 1995 CAR/b/s 1980–1988 158 1.651y – −15.1018m –
Suzuki 2000 BH/b/s 1991–1996 826 – – −11.502y –
Slovin, Sushka and Lai 2000 MM 1986–1994 220 – – −3.092d –
Ho 2005 BH/a/si 1989–1997 627 3.753y 6.823y −19.503y −8.533y
–//– –//– BH/a/bi –//– 531 10.013y 21.663y −17.623y −15.693y
–//– –//– BH/b/sb –//– 562 21.933y 27.693y −18.263y −19.923y
–//– –//– CTAR/3FF –//– –//– – – −11.883y −3.963y
–//– –//– CTAR/4FM –//– –//– – – −9.363y 0.003y
Ngatuni et al. 2007 BH/a/s 1986–1995 818 30.352y – −32.105y –
–//– –//– BH/a/si –//– –//– 30.982y – −40.275y –
–//– –//– BH/a/sb –//– –//– 24.762y – −41.805y –
This table provides a summary of prior literature on Seasoned Equity Offerings (SEO) in the UK and US. All returns for the US market are annualised based on the assumptions in Ritter
(2003, p. 267). All results in UK studies are presented for a k-year period subsequent to the event except for Levis (1995) where the post-SEO results are reported for a period of 18 months
and Slovin et al. (2000) in which post-SEO announcement excess returns are reported for a period of 2 days surrounding the announcement of the equity issue. The CTAR in Eckbo et al.
(2000) is based on NYSE/Amex firms. The coding system used for the description of the adopted methodologies is the following: BH: Buy and Hold abnormal returns; CAR: cumulative
abnormal returns; CTAR: calendar time abnormal returns; MM: market model; a: firm matching approach; b: portfolio matching approach; 3FF: Fama and French three-factor model; 4FM:
Carhart four-factor model; s: size benchmark; si: size/industry benchmarks; sb: size/book-to-market value of equity benchmarks; bi: book-to-market value of equity/industry benchmarks.
EW stands for equal-weighted portfolio; VW stands for value-weighted portfolio; and n stands for the number of samples in the study.
should not be considered as inconsistent with market efficiency. Over the long term both phenomena
eventually appear with the same frequency. So, the market under-reacts as frequently as it over-reacts
and this is consistent with market efficiency, which only requires that investors’ expectations are unbi-
ased and correct on average or over the long term. With regard to bad-model errors (Barber & Lyon, 1996;
Barber, Lyon, & Tsai, 1999; Fama, 1998), long-term event studies are found to be extremely sensitive to
different methods of calculating returns. Important issues concern new listing bias, rebalancing bias
and cross-sectional dependence. If long-term returns are calculated using the buy and hold abnormal
return metric (BHAR) over long intervals, abnormal returns will be overestimated. As most of the early
studies on SEOs’ long-term underperformance have used these returns metrics, their results should be
considered weak. BHAR calculations can be error free in cases where the population mean abnormal
stock return of a portfolio is equal to zero. However, this approach is still subject to a large amount of
cross-sectional dependence (Barber et al., 1999).
However, these two counter-arguments have not been found totally convincing in explaining the
SEO anomaly. Having addressed the issues of new-listing bias, the rebalancing bias and the skewness
bias, Barber and Lyon (1997) produce evidence that instead of using a single portfolio or an asset
pricing model as benchmark, an alternative methodology that matches sample-firms to control-firms
on the basis of company-specific characteristics can improve significantly the statistical power of event
studies using long-run BHAR metrics.
Barber and Lyon’s (1997) evidence was further supported by Jegadeesh (2000) and Loughran and
Ritter (2000). Using a variety of benchmarks in order to avoid Fama’s (1998) ‘bad-model’ bias, Jegadeesh
(2000) provided evidence on the inappropriateness of factor-model benchmarks and the robustness of
SEOs’ long-term underperformance. Similarly, using the Fama and French (1996) three-factor model in
a series of simulations, Loughran and Ritter (2000) concluded that the underperformance of companies
conducting SEOs is a reliable result in both high- and low-volume equity-issuance periods while most
severe misvaluations are reported among small size stocks during high-volume periods.
An alternative explanation was presented by Eckbo, Masulis, and Norli (2000). Testing a sample of
4860 SEOs made by US companies covering the period 1963–1995 and using different macroeconomic
variables in a six-factor model to generate risk-adjusted expected returns, the authors concluded that
long-term underperformance is associated with lower post-issue risk exposure and that the evidence
“. . .strengthens the growing suspicion that the new equity puzzle is the result of poor risk controls
when the analysis relies on the matched-firm technique”. However, as Jegadeesh (2000) soon pointed
out these results may be affected by the inclusion of IPO companies in their matched-firm sample and
the fact that IPOs historically are producing lower long-term returns than SEOs.
The last explanation regarding the persistent long-term underperformance of companies following
an SEO is based on the asymmetry of information between management and investors and agency
problems. Empirical studies in the US and abroad produce evidence of SEOs acting as a prologue to
subsequent deterioration in operating performance (Hansen & Crutchley, 1990; Kabir & Roosenboom,
2003; Loughran & Ritter, 1997). Under this view, during a period of overvaluation, some firms may
attempt to manipulate earnings before issuing equity so as to mislead investors regarding the profit
potential of those firms. As Loughran and Ritter (1997, p. 1847) argue “. . .our interpretation of the
findings of this and other articles is that some, but by no means all, issuing firms are intentionally, and
successfully, misleading investors”.
In contrast to the wealth of evidence relating to SEOs in the US, empirical research on SEOs in the
UK is still very limited. In a study testing the price pressure hypothesis for UK data, Marsh (1979)
produced evidence of post-SEO positive abnormal returns. Using a dataset consisting of the entire
population of UK rights issues for the period 1962–1975, the author concluded that his results are in
favour of semi-strong form efficiency and can be attributed to a small size effect rather than the SEOs’
announcements (Marsh, 1979, pp. 857–860). Levis (1995) was the first to document the SEO long-
term underperformance effect in the British market. Using several benchmark indices for UK equities,
Levis tested a dual hypothesis of pre-offer positive abnormal returns and post-offer negative abnormal
returns. Testing a sample of 125 UK companies covering the period 1980–1988, the author reported
a 12-month positive abnormal return prior to a rights issue followed by a negative performance of
a maximum −15.10% for up to 18 months after the event. These results are corroborated by Suzuki
(2000) in his study of price reactions during the announcement period. Using a sample of 694 rights
issues covering the period 1991–1996, Suzuki reported a post-offer buy-and-hold abnormal loss for
equity-issuing companies of 11.5% during the 2 years after the event.
A similar picture was also painted by Slovin et al. (2000). In a study examining the valuation effects
for alternative methods of flotation, using a sample of 220 rights issues for the period 1986–1994
the authors reported an average excess return of −3.09% for the 2-day event window of −1 and 0
with 0 being the date of the initial announcement of an SEO. As Slovin et al. (2000, p. 188) con-
clude, “. . .firms utilising insured rights offerings sustain more adverse valuation effects than firms
that conduct placings”.
Abhyankar and Ho (2002) tested a sample of 670 rights issues for the period 1989–1997 and reported
an abnormal loss of −18.5% in a standard event study methodology but no average negative abnormal
performance for issuing companies with a calendar-time methodology that use the Fama and French
(1996) three-factor model. As the authors conclude, long-term abnormal performance measurement
is very sensitive to the methodology adopted and they support Fama’s (1998) argument that the SEOs’
underperformance may be indeed an artefact of the methodology used.
Ngatuni, Capstaff, and Marshall (2007) contradict these results by providing evidence on the
robustness of post-SEO underperformance using multiple benchmarks and classification procedures.
Matching issuing with non-issuing firms on the basis of firm-size, industry, year of offering, volume
issue activity and the purpose of raising equity, the authors reported a 41.8% abnormal loss for issuing
firms compared to their non-issuing counterparts. As they concluded, investors in the UK would have
been considerably better off if they had not invested in the shares of firms that had made rights issues
during the previous 5 years, while as soon as companies announce a rights issue, investors should
immediately switch into shares of matching non-issuing firms (Ngatuni et al., 2007, p. 60).
3. Data and methodology
Prior research on SEOs in the UK has mainly used Thomson’s Datastream International (TDS) and
the London Share Price Database (LSPD) as the main sources of accounting and financial/stock market
data. However, recent studies on the above data sources have reported evidence of survivorship bias
and problems of data integrity that can only be overcome after careful filtering and cross-referencing
amongst the different data sources (Andrikopoulos, Daynes, Pagas, & Latimer, 2007; Chakrabarty &
Trzcinka, 2006; Gregory, Harris, & Michou, 2001; Ince & Porter, 2006; Nagel, 2001; Vivian, 2007). The
reported survivorship bias in the coverage of accounting data and the dead stock file in TDS (Gregory
et al., 2001; Nagel, 2001) could partially explain the use of limited samples in prior UK SEO research.
Similarly, in line with Fama’s (1998) argument, certain methodological decisions can also result in
the intentional introduction of survivorship bias in research. For example, the decision to exclude all
issuing firms that did not survive the entire 5-year post-offering period in Ngatuni et al.’s study (2007)
inevitably precludes all cases of companies that were either taken over or were de-listed in the 5-year
post-issue period, with unknown consequences for the validity of the investigation’s results.
In an attempt to overcome all these problems, this study uses data from an alternative data source,
the UK Equity Database (UKED). Prior research has shown (Andrikopoulos et al., 2007) that the UKED is
currently the most complete database for the UK main market covering both financial and accounting
data for the entire body of securities that have been fully listed in the UK at any time in the period
July 1987–March 2002.3 Using the UKED as a source for the industrial classification of companies also
solves an additional problem inherent in prior UK research on SEOs. Research on UK stock market listed
industries typically encounters the problem of firms switching across industry classification sectors.
Most UK databases record only the latest industrial classification, based on the most recent data. Fur-
thermore, industries on the London Stock Exchange have been subject to major classification changes
in the past decade with the most important being the major revision of industrial classifications by the
3
UKED does not cover USM, AIM, TechMARK, OTC or Third Market companies, except for those that were fully listed at any
time during 1987–2002. UKED gives the full financial history for these stocks and not merely for the period in which the stock
was fully listed, while the Market Listing file allows the researcher to identify all and only those stocks that were fully listed at
the end of each month and those that were trading at the end of each month, i.e. neither temporarily suspended nor with the
listing cancelled.
FT Actuaries Industry Classification System (FTSA) in 1994 and 1999. For example, if we compare the
number of industrial cycles recorded by Thomson’s Datastream and the FTSA system the difference
is very significant with TDS identifying 41 sectors4 while the SE and FTSA systems combined list 279
industries (339 classification codes) for the period 1987–2002.5 While this major difference in the num-
ber of industries recorded by different systems may not affect statistical inferences based on the data,
it could limit the economic significance of the empirical findings. UKED’s sector file was constructed
from archive material including the Financial Times, the Hemscott Company Guide and its more recent
manifestations, the Lehmann Communications Company Guide and Pinsents Company Guide. The pri-
mary source for the industry classification is the FTSE Actuaries Industry Classification System, which
is compiled and administered by FTSE International Ltd. in conjunction with the Institute of Actuar-
ies and the Faculty of Actuaries. Therefore, it is believed that using this source will provide the most
accurate picture of industrial classifications during the entire period under examination.
According to Table 2, for the entire period April 1982–2004 the total number of records for rights
issues is 3593. From this global population, 1637 records are excluded as they represent either rights
issues that took place before or after the period under examination or they are associated with issues
of preference shares, loan stock or complex rights issues involving multiple assets, units or complex
instruments. A further 378 records are also exempt as they are associated with a period in which the
various equity issuing companies were not in the official listings and another 36 records are excluded as
they are associated with companies in sectors with accounting data incompatible with the remainder
of the sample. The final sample for examination comprises of 1542 rights issues out of the 1956 records
of rights issues of ordinary shares. This sample represents 78.83% of the total body of rights issues that
occurred during the period January 1988–December 1998 and is the biggest sample ever used in SEO
research in the UK.6
Fig. 1 illustrates the distribution of the selected sample of rights issues over the period under
review. The average annual sample size is 140 issuing events per calendar year and this distribution
fully reflects economic conditions in the UK during the examined period. For example, the smallest
number of issues is reported for the years 1992 and 1998 with the maximum number in 1993. The
fall in rights issue events in 1992 is mostly attributable to the weak economic conditions during the
recession, followed by a surge of new issues in 1993 and 1994 as the economy recovered. From 1996
onwards, the fall in new rights issues should be attributed to the increased popularity of other methods
for issuing equity such as the use of placings. This is consistent with prior research on SEO events in
UK market (Barnes & Walker, 2006).
4
TDS currently follows the Industry Classification Benchmark (ICB) system which comprises of 10 industries, 19 super-sectors,
41 sectors and 114 sub-sectors.
5
Unlike the system in the US, in the UK there have been numerous changes to the industry classification system in the
past 20 years. For the years 1979–1993 all stocks listed on the London Stock Exchange were classified according to the Stock
Exchange (SE) classification system that included 139 two-digit codes. This SE system was replaced in January 1994 by the
FTSEA industrial classification system with 79 three-digit codes. This system was again amended in April 1996 with the re-
classification of all existing companies into a new coding system comprised of 121 two- and three-digit industry codes. Finally,
the whole classification system was replaced in January 2006 by the ICB system to promote compatibility with the US stock
market industry classification system.
The problem with the earlier classification systems is the duplication of industry codes. For example, according to the SE system
for the period December 1978–December 1993 the code 45 was assigned to Breweries. However in January 1994 the sector
Breweries was assigned the code 310 by the FTSEA. From April 1999, Breweries were assigned the code 560-Restaurants, Pubs and
Breweries. At the same time the code 45 was assigned to the sector Mining Finance. These changes in the classification system
pose important difficulties for any research in UK sectors, especially using data sources that report only the latest classification
system such as the TDS.
To avoid this problem, the UKED records the actual title of the industry and how this industry/sector has evolved through time.
For example, the group of companies listed under the code 45-Breweries up to December 1993 was allocated to the sectors
310-Breweries and 320-Spirits, Wine and Ciders after January 1994. In January 1999, the sector 310-Breweries was re-classified as
560-Restaurants, Pubs and Breweries, while the sector 320-Spirits, Wine and Ciders was replaced by 415-Beverages: Brewers and
416-Beverages: Distillers and Vintners. The continuous changes in the industry classification system and the relevant changes in
the names of these sectors over the last 20 years are described in this study as “industry cycles”.
6
The spread of rights issues according to industrial classification is presented in Appendix A. According to the industry
information presented, the chosen sample represents the most accurate representation of the UK market before as well as
after the major revisions to industrial classifications introduced in 1994 and therefore it is free from possible survivorship and
look-ahead biases.
Table 2
Summary of UK equity database’s records of rights issues and sample selection.
REG ID Definition Totala Exclb Incc
200 Rights issue in shares with the same code 1925 754 1171
201 Offer for subscription in shares with the same code on a maximum 1093 370 723
entitlement basis
202 Offer for subscription in shares with the same code on a minimum 109 64 45
entitlement basis
203 Offer for subscription in shares with the same code on an m for n basis 62 45 17
204–214 Other Rights Issues (preference shares, loan stock, complex financial 404 404 0
instruments, units comprising various shares, etc.)
3593 1637 1956
Other excluded records

1 Period of listing on AIM, Exploration Securities Market, Irish Smaller (378)
Companies Market, Third Market, Not-Listed Period, USM (London), USM
(Irish)d
2 Excluded rights issues (Financial and Utility Sectors)
(a) Banks 5
(b) Foreign banks 4
(c) Investment companies 6
(d) Merchant banks and issuing houses 3
(e) Unapproved UK investment companies 2
(f) Water works 2
(g) Composite insurance 4
(h) Insurance 8
(i) Life assurance 2 (36)
Total sample of rights issues under examination (January 1988–December 1998) 1542
a
Total number of records for rights issues in UKED, covering the period April 1982–April 2004.
b
Records of rights issues excluded from the study. From the 1637 records, 962 rights issues occur prior to the 1st of January
1988 while 434 records are associated with the period 1st of January 1999 to 5th of April 2004. The remaining 241 excluded
records of rights issues are associated with the issue of preference shares, loan stock or complex rights issues involving multiple
assets (UKED codes 204–214).
c
UKED records of rights issues in ordinary shares covering the period 1st of January 1988–31st of December 1998.
d
These records are associated with the period where the underlying companies were not yet listed in the Official Listing of
the London Stock Exchange.
Fig. 1. Distribution of sample of rights issues under examination.

This figure illustrates the distribution of the sample of rights issues selected for examination. The sample comprises of all
rights issues from companies registered on the London Stock Exchange’s Official listing during the period 1st January 1988–31st
December 1998. The sample excludes all rights issues undertaken while these companies were listed on the Alternative Invest-
ments Market, Unlisted Securities Market, Exploration Securities Market, Irish Smaller Companies Market and Third Market and
while these companies were unlisted. In line with previous studies, all financial and utility companies are also excluded from
the examination leading to a total sample of 1542 rights issue events.
Post-issue market performance for both equity issuers and the various market benchmarks is esti-
mated using the buy-and-hold returns methodology (BHRs).7 Analytically, holding period returns for
security i are estimated as

k
BHRi,k = (1 + ri,t ) − 1 (1)

t=1
where BHRi,k is the buy-and-hold return for security i for a holding period of k = 6, 12, . . ., 36 months.
To allow comparison with prior research in the UK and the US, post-event market performance for
equity issuers is compared to their immediate business rivals and three alternative market character-
istics, namely (a) momentum, (b) size and (c) book-to-market value of equity (B/M) by altering the
size-adjusted methodology introduced by Lakonishok, Shleifer, and Vishny (1994) and combining it
with the return measurement methodology developed by Conrad and Kaul (1993).
For the purposes of analysis, at the beginning of each calendar month all UK fully-listed securities
are assigned to an industry-, momentum-, size- and B/M-portfolio on the basis of their industrial clas-
sification (industry-control benchmark), prior 6-month performance (momentum-control benchmark),
market capitalization (size-control benchmark) and book value of equity to market value of equity (B/M-
control benchmark). To avoid the problem of ex post sample selection bias reported in Loughran and
Ritter (1997), all companies that recorded an SEO or IPO in the period of t − 36 months prior to the
event are excluded from these benchmark portfolios. The average BHRs for the k-holding period on the
equally weighted benchmark portfolio are then estimated using the following mathematical notation:

1
n k
ABHRp,k = (1 + ri,t ) − 1 (2)
n
i=1 t=1

k
where t=1
(1 + ri,t ) − 1 is the k-month BHR for security i with similar industrial classification,
similar market performance in the 6-month period prior to the SEO event, similar size and similar
book-to-market value of equity in the month of the event. For each security that is taken over or
becomes de-listed all proceeds are reinvested equally in the remaining securities within the portfolio.
The only exception is for companies that went into liquidation, administration, etc. and their returns
are replaced with −1.
The k-month adjusted returns BHARp,i,k are calculated as the difference between the post-event
issuers’ BHRi,k and their corresponding matching-portfolio benchmarks’ BHARp,k , for k = 6, 12, 18, 24,
30, and 36 months, or

k
1
n
k
BHARp,i,k = (1 + ri,t ) − 1 − (1 + ri,t ) − 1 (3)

n
t=1 i=1 t=1
Finally, following (3) the average industry-, momentum-, size- and B/M-adjusted returns for N securi-
ties over the holding period k are defined as
1
N k
ABHARN,k = BHARp,i,k (4)

N
i=1 t=1
Regarding the problem of positive skewness caused by the use of broad buy-and-hold reference portfo-
lios in the calculation of long-term abnormal returns, statistical inferences in this study are estimated
7
Prior research in the UK market has favoured the use of both the cumulated abnormal returns (CARs) and buy-and-hold abnor-
mal returns (BHARs) methodologies. However, as Jensen’s inequality E{[1 + it ]/[1 + it−1 ]} > 1 implies, cumulating monthly
returns will introduce an upward bias in the estimation of the cumulative abnormal returns for securities that are low priced
compared to an average benchmark (Barber and Lyon, 1997; Conrad and Kaul, 1993; Kothari and Warner, 1997; Ritter, 1991).
In addition, as the use of a CAR method requires the continuous rebalancing of portfolios, it is practically unrealistic due to the
higher transaction costs involved.
using a bootstrapped skewness-adjusted t-statistic methodology introduced by Lyon, Barber, and

Tsai (1999). Analytically, all t-values for all industry-, momentum-, size- and B/M-excess returns are
estimated as follows:
√ 1 2 1
tsa = n S+ ˆ +
S ˆ (5)
3 6n
where S = ϑ̄/ (ϑ), ϑ is the excess-returns for the equity issuers, (BHARp,i,k ), n is the number of com-
panies in the sample and ˆ is an estimate of the coefficient of skewness calculated as
n 3
i=1
(ϑi,t − ϑ̄)
ˆ = 3
n(ϑ)
As regards the examination of operating performance for equity issuers, this study adopts a methodol-
ogy similar to that introduced in US research on operating performance (Barber & Lyon, 1996; Loughran
& Ritter, 1997). Excess operating performance is therefore calculated as the difference between the
operating performance of a company following a rights issue and the median operating performance8
of a benchmark-portfolio comprised of all non-issuing companies with similar industrial classification,
momentum-, size- and B/M characteristics during the month of the issue. In line with prior studies
(Kabir & Roosenboom, 2003; Loughran & Ritter, 1997) each non-issuing firm included in the industry
control portfolio should not have participated in any IPO or SEO activity during the t − 36 months prior
to the event. This study therefore is free from an ex post sample selection bias.
Post-event excess operating performance is estimated for up to t + 36 months following the event.
This study uses the t + month convention instead of t + year to improve precision in the definition of
changes in the aggregate performance of the control-portfolios. The main rationale for the use of such
a convention is to accommodate the use of alternative accounting closing dates by UK companies.
Compared to US accounting principles that require companies to close their annual accounts at the end
of each calendar year, UK firms have differing accounting year-ends with the majority of companies
closing their annual reports in the end of the months March, September or December. At the same
time, this flexible accounting system has also resulted in companies closing their accounts more than
once a year or at intervals stretching further than the standard 12-month reporting period. Hence, as
the mean/median operating performance of any portfolio comprised of UK companies can change in
each calendar month, estimating excess operating performance for issuers compared to all control-
benchmarks on a month-by-month basis solves the problem of introducing look-ahead bias in the
study and the drawing of possibly erroneous inferences.9
Using a methodology similar to Barber and Lyon (1996), the estimation of operating performance
is calculated using both a range of ‘level’ and ‘change’ models. The expected operating performance
for issuers using ‘level’ type models is defined as
j
E(Pi,t ) = PBi,t (6)
j
where Pi,t is the performance of SEO company i at time interval t; PBi,t is the performance of the
matching-portfolio for firm i at time t and for the alternative definitions of comparison groups
j = 1, . . ., 4 (1 = industry, 2 = momentum, 3 = size and 4 = B/M); while E(·) is the expectations operator.
Excess/abnormal operating performance is then defined as the difference in the level of annual per-
formance for issuers and the median performance of the four control benchmark groups or
L j
AOPi,t = Pi,t − PBi,t (7)
8
Because of the problem of skewness in accounting ratios, prior studies in operating performance tend to report median
values (Barber and Lyon, 1996; Kabir and Roosenboom, 2003; Loughran and Ritter, 1997; Mikkelson et al., 1997). This study
adopts a similar approach to this problem.
9
The use of UKED solves this particular problem as the database reports the final announcement and AGM dates for all
companies.
L is the abnormal operating performance of firm i at time t; P is the level of performance of

where AOPi,t i,t
j
the sample company i at time t; and PBi,t is the median level of performance of the benchmark-portfolio
for firm i at time t and for the alternative definitions of comparison groups j.
Using a similar convention, the abnormal ‘change-type’ operating performance for equity issuers
is defined as the difference between the annual changes in the operating performance of the sample
firm and that of the matching-portfolio:
j j
Pi,t − Pi,t−1 PBi,t − PBi,t−1
C
AOPi,t = − (8)
Pi,t−1 j
PBi,t−1
C is the abnormal operating performance of firm i at time t; P and P

where AOPi,t i,t i,t−1 denote the perfor-
j j
mance of the sample company i at time t and t − 1; and PBi,t and PBi,t−1 represent the performance of
the benchmark-portfolio for firm i at time t and t − 1. The superscript c is used to improve clarity and
distinguish the models between the “change” and “level” type. Consistent with the ‘level’ model stated
in (6) the above ‘change’ model formulation can be re-stated in terms of the underlying assumption
being tested. Hence, the hypothesis tested is that of indifference in the changes of operating perfor-
mance between the equity issuers and the matching-portfolio benchmark, AOPi,t C = 0; or, in terms of
expectations, the key assumption underlying these comparisons is that the expected performance of
the sample firm i at time t should be equal to the lagged firm performance and the relative change in
j
the performance of the corresponding matching-portfolio PBi,t :
j j

PBi,t − PBi,t−1
E(Pi,t ) = Pi,t−1 +1 (9)
j
PBi,t−1
j
E(Pi,t ) = Pi,t−1 [PBi,t + 1] (10)
Using the above ‘level’ and ‘change’ models, operating performance of equity issuers is evaluated using
five accounting indicators. According to Table 3, the issuers’ ability to generate fresh cash inflow from
operating activities and indicate potential future growth is assessed by the annual growth of turnover.
As UKED reports the precise balance sheet, final announcement and AGM dates, all accounting data
are free from look-ahead bias.
The assessment of equity issuing firms’ profitability is carried out using the year-to-year changes
in Earnings Before Tax (EBTi, t ) as well as a variant of Return on Assets (ROA) defined as EBT divided
by the total book value of assets. As the use of a Turnover measure and its trend can lead to incorrect
inferences regarding firms’ operating performance,10 as well as the fact that the use of the above ROA
measures can be affected by the increase in assets generated by the proceeds of the rights issues, this
study also uses an alternative definition of profitability, the Net Profit Margin (NPMi,t ). The NPMi,t is
defined as the relationship between the level of annual EBT and Turnover for the sample firm i at time t.
To assess sub-optimal aggressive expansion by issuing firms this study also compares the annual
growth in fixed assets of issuers with that of their corresponding non-issuers matching-portfolios. In
their examination of the pecking-order model in the US market, Jung, Kim, and Stulz (1996) provide
evidence that firms that issue equity against the pecking order do so in order to pursue an aggressive
investment policy against the interests of their shareholders (Jung et al., 1996, p. 180). Therefore, a
comparison of the Fixed Assets Growth in combination with the ROA and Net Profit Margin indicators
can be used as a proxy for managerial overconfidence. Analytically, given managerial overconfidence,
aggressively expanding equity issuers in the early period after the event should, on average, demon-
strate a sharp growth in fixed assets compared to their matching-portfolio. This growth should then
10
The use of the Turnover measure by itself might not be capable of providing a clear picture of a company’s improvement in
operational efficiency. Under financial distress, a firm might seek primarily to increase the level of sales in order to bring new
cash into the business at the expense of a company’s internal efficiency improvement. Hence, a genuine decrease in operational
efficiency will be indicated by a positive trend in Turnover Growth but a negative trend in the Profit Margin measure.
Table 3
Models of abnormal operating performance and accounting measures.
Panel A: models of expected operating performance
Model Models of excess operating performance Description/comparison group

C
1 AOPi,t = Pi,t − PBi,t
1
Difference between the annual change in sample firms’
performance and the annual change in industry
performance
C
2
performance and the annual change in
matching-momentum portfolio benchmark
C
3
performance and the annual change in matching-size
portfolio benchmark
C
4
performance and the annual change in matching-B/M
portfolio benchmark
L
1
Level difference to industry performance
L
2
Level difference to matching-momentum portfolio
L
3
Level difference to matching-size portfolio
L
4
Level difference to matching-B/M portfolio
Panel B: accounting measures of operating performance
Accounting indicator Description
Growth of turnover Defined as the increase in the reported turnover

figure between t − 1 and t = 0, or
Ti,t = (Ti,t − Ti,t−1 )/Ti,t−1
Growth in Earnings Before Tax Defined as the increase in the reported earnings
after interest and before tax figures between t − 1
and t = 0, or EBTi,t = (EBTi,t − EBTi,t−1 )/EBTi,t−1
Return on Assets (ROA) Defined as the EBTi,t divided by the book value of
assets of company i at time t, or ROAi,t = EBTi,t /TAi,t
Net Profit Margin Defined as the ratio of the annual EBT and the level
of Turnover for company i at time t:
NPMi,t = EBTi,t /Ti,t
Growth in fixed assets Estimated as the increase in the reported total
fixed assets of company i between time t − 1 and
t = 10, or FAi,t = (FAi,t − FAi,t−1 )/FAi,t−1 ; where
total fixed assets is defined as the sum of all
tangible fixed assets, intangible fixed assets,
property and fixed asset investments
This table reports the models of expected operating performance and the relevant accounting measures used in the study.
Adopting a similar methodology to that of Barber and Lyon (1996), the estimation of operating performance is calculated by
utilising both a variety of ‘level’ and ‘change’ type models that intend to capture the performance differential between the
equity issuers and a corresponding control benchmark-portfolio. Models 1, . . ., 4 are used to capture relative annual changes in
C j C
the operating performance for issuers or AOPi,t = Pi,t − PBi,t , where AOPi,t is the abnormal operating performance for sample
j
firm i at time t; Pi,t is the annual change in operating performance of sample firm i and for time interval t − 1 to t = 0, and PBi,t
is the annual change in the operating performance for the matching-portfolio benchmark group j = 1, 2, 3, 4. The benchmark
groups j = 1, . . ., 4 correspond to the industry, momentum, size and book-to-market value of equity (B/M) classifications. Similarly,
models 5 to 8 examine the difference on the level of operating performance at discrete times between the equity issuers and
the corresponding matching-portfolio groups j = 1, . . ., 4.
be followed by a declining trend in the profitability level while, as these companies fail to capitalise
on their investments, the previous growth in fixed assets should then start to decline and inevitably
reach levels below those of the matching-portfolio median values.
From the above five indicators, the excess growth in (a) turnover, (b) EBT and (c) fixed assets for
equity issuers compared to their corresponding matching-portfolio is assessed using the relevant
‘change’ models, while the remaining two indicators, (a) ROA and (b) NPM, are assessed using ‘level’-
type models.
Table 4
Market performance following rights issues compared to alternative control-benchmarks.
Industry-matched Momentum-matched Size-matched B/M-matched

(N = 1542) (N = 1542) (N = 1542) (N = 1473)
tsa tsa tsa tsa
BHARk=6 −0.0115 −1.381 −0.0121 −1.512 −0.0165 −2.038 *

−0.0178 −2.122*
BHARk=12 −0.0472 −3.325** −0.0468 −3.372** −0.0533 −3.598** −0.0563 −3.707**
BHARk=18 −0.1032 −4.247** −0.1038 −4.221** −0.1137 −4.242** −0.1220 −4.566**
BHARk=24 −0.1398 −4.539** −0.1469 −4.708** −0.1721 −5.880** −0.1779 −5.047**
BHARk=30 −0.1709 −4.322** −0.2086 −4.706** −0.2200 −6.154** −0.2323 −4.805**
BHARk=36 −0.1789 −4.288** −0.2439 −5.139** −0.2421 −5.090** −0.2620 −5.161**
This table reports the average buy-and-hold abnormal returns (ABHARN,k ) for equity issuers compared to their corresponding
industry, momentum, size and book-to-market value of equity (B/M) benchmarks. For each calendar month all equity issuing
firms are matched against an equally weighted portfolio comprised of all securities of similar (a) industrial classification, (b)
pre-12 months’ market performance (momentum), (c) market capitalisation (size) and (d) B/M. In line with Loughran and Ritter
(1997), ex post sample selection bias is eliminated by excluding from the benchmark portfolios all companies that recorded
any SEO or IPO activity in the period of t − 36 months prior to the event. Market performance of issuers is measured using
a buy-and-hold strategy for equity issuers and for k = 6, 12, . . ., 36 months following the event. Post-event performance on
the matching-portfolios is estimated as the average k-month buy-and-hold returns on an equally weighted portfolio, ABHRp,k ,
which comprises of all securities of similar industrial, momentum, size and B/M classification that are actively traded during
the calendar month of the equity issue event. Excess BHRs on equity issuers, BHARi,k , is estimated as the difference between
issuers’ BHRi,k and the ABHRp,k of the corresponding (a) industry-portfolio and (b) momentum-, size- and B/M-deciles and for all
portfolio formation periods. Statistical significance is estimated using the skewness-adjusted t-statistic methodology introduced
by Lyon et al. (1999).
*
Indicates significance at the 5% level.
**
Finally, consistent with prior research (Kabir & Roosenboom, 2003; Loughran & Ritter, 1997) the
estimation of the statistical significance of the median operating performance-difference between
issuers and non-issuers is determined by calculating the Wilcoxon signed-rank sum test.
4. Post-event market performance for equity issuers
Table 4 reports the average BHARs for equity issuing companies compared to their corresponding
industry, momentum, size and book-to-market value of equity portfolio-benchmarks. For the entire
period under examination the post-event performance for equity issuers is reported to be negative
against all four control-benchmarks. Compared to the average industry performance, equity issuers
report a loss of 1.15% within the first 6 months after the event. This abnormal loss increases steadily
up to 13.98% and 17.89% 24 and 36 months after the event. The reported skewness-adjusted t-statistics
are −4.539 and −4.288, both significant at the 1% level.
The post-event performance of issuers against the corresponding momentum decile follows a sim-
ilar pattern. Within 6 months following the rights issue of new equity, companies report an abnormal
loss of 1.21% compared to a portfolio of stocks with identical pre-event performance. For the remaining
buy and hold periods the difference in performance consistently deteriorates, reaching a maximum
underperformance of 24.39% (tsa -value of −5.139) 36 months following the equity issue.
The momentum-excess BHRs reported contradict the existing literature on short-term momentum
(Fama & French, 1996; Jegadeesh & Titman, 1993; Rouwenhorst, 1998; Moskowitz & Grinblatt, 1999).
Under the existence of a short-term momentum effect, the 6- and 12-month BHRs for issuers com-
pared to their momentum portfolio benchmark are expected to be insignificantly different to zero.
However, as our results indicate, there is an economically significant abnormal loss for both the k = 6
months holding period and an economically and statistically significant underperformance for the
k = 12 months holding period following the equity issue.
Finally, a similar performance is also reported against the size and B/M matching-portfolios, where
issuers’ market performance steadily deteriorates leading to a total abnormal loss of 24.21% and 26.20%
at k = 36 months after the SEO event (tsa -values of −5.090 and −5.161, respectively).
Fig. 2. Average buy-and-hold returns (ABHRs) for (i) equity rights issuers, (ii) industry-, (iii) momentum-, (iv) size- and (v)
B/M-benchmarks: historical performance on a k = 36 months strategy.
This figure illustrates the average market performance of the k = 36 month buy-and-hold strategy for equity rights issuers
and the four benchmark-portfolio comprised of all those non-issuers of similar 6-month pre-event stock market performance
(momentum), industrial classification, size and book-to-market value of equity (B/M) micro-characteristics during the month of
the equity rights issue. All matching-portfolios are calculated as follows: at the beginning of each calendar month all UK actively
traded fully-listed securities are sorted into deciles on the basis of their momentum, size and B/M micro-characteristics using
equal weights. Companies that reported a rights issue of equity in the period of t − 36 months prior the event are excluded in

order to eliminate possible ex post selection
k=36 36 month
bias. The average buy-and-hold returns
k=36 on these decile portfolios are
n
calculated as ABHRp,k=36 = (1/n) (1 + ri,t ) − 1 where (1 + ri,t ) − 1 is the k = 36 months buy-and-hold
i=1 t=1 t=1
returns for security i. For each security that is taken over or is de-listed during the holding period, all proceeds are reinvested
equally in the remaining securities within the decile portfolios/industry-portfolios. The only exception is for companies that
went into liquidation, administration, etc. whose returns are replaced with −1.
Fig. 2 illustrates the k = 36 buy-and-hold strategy for equity issuers and the four benchmarks used
for the entire period from January 1988 to December 1998. Apart from the year 1997 in which, on aver-
age, issuers are found regularly to outperform the corresponding matching-portfolios, a performance
very much affected by the excessive market valuations of the period 1999 to 2000, for the remainder of
the period issuers’ performance is consistently below that of non-issuers of identical pre-event perfor-
mance and that of non-issuers with an identical industrial classification. The worst underperformance
was recorded in the early years of the investigation (1988–1991) when the average BHARN,k=36 for
issuers are consistently negative.
The above results confirm the robustness of the findings of long-term underperformance of com-
panies engaging in rights issues reported in prior research (Levis, 1995; Ngatuni et al., 2007; Suzuki,
2000). As this underperformance is pervasive across different control-benchmarks and time periods a
possible hypothesis that may explain such an effect is that of the ‘forward-looking’ nature of the mar-
ket. Under conditions of market efficiency, as soon as companies announce an equity issue, Bayesian
investors should immediately adjust their expectations. If such is the case and in accordance with
the ‘asymmetry of information’ hypothesis a gradual fall in market performance caused by an equity
issue event should reflect a relative and continuous fall, or an expectation of a fall, in the fundamental
value of these companies and in their ability to sustain future superior performance compared to their
competitors.
Even if on average the above results indicate an abnormal loss for equity issuers, in individual cases,
the post-issue market performance should also be a true reflector of the underlying performance of
these companies, with post-issue out-performance associated with good underlying operating perfor-
mance and vice versa.
5. Post-event evaluation of operating performance for equity issuers
5.1. Operating performance compared to matching-portfolios’ median
For each calendar month all equity issuing firms are matched against a portfolio comprised of
all companies in the same industry, momentum-, size- and B/M-matching deciles while excluding
companies that recorded an SEO or IPO in the period of t − 36 months prior to the event. Excess
operating performance is then estimated as the difference between the issuers’ performance and the
median operating performance of their corresponding matching-portfolio.
Five indicators of operating performance are estimated. The first four indicators, Growth in Turnover
(Ti,t ), Growth in Earnings Before Tax (EBTi,t ), Net Profit Margin (NPMi,t ) and ROA (ROAi,t ) are used as
a measure of potential improvement or lack of profitability. The last indicator, Growth in Fixed Assets
(FAi,t ), is used as a proxy of excess spending/aggressive investment policies following the equity issue
(increased trend) and to determine the possible failure to utilise successfully the cash raised after the
event (sharp decrease). If post-event underperformance is a reflector of poor operating performance,
we would expect issuers immediately to report a fall in all profitability indicators after the rights issue.
The level of operating desperation will be measured by the adverse relationship between the growth
in Turnover and Earnings Before Tax, as companies in financial and operating distress will generally
be keen to increase sales at minimum profit margins. Similarly, managerial overconfidence should be
captured by the Growth in Fixed Assets and ROA measures. This is due to the fact that, after the offering of
new equity, irrespective of the reason for the issue (takeover, expansion, new project, etc.), companies,
on average, are expected to report a disproportionate increase in fixed assets compared to industrial
averages. At the individual company level, issuers with vigilant financial management policies should
exhibit either an increase in profitability with the minimum changes in fixed assets or a relatively
stable fixed asset expansion policy backed by additional financing generated by either equity or debt
as predicted by pecking order theory. Nonetheless, consistent with the argument of Jung et al. (1996),
if managers are overconfident regarding the potential profitability of their selected expansion plans
or are engaged in funding unprofitable ‘empire-building’, fixed assets will be expected to increase
dramatically in the period immediately after the offering, while as soon as profitability starts to fall
assets growth should report a steep drop.
The results of companies’ post-rights issue operating performance are reported in Table 5. On
average, issuers’ excess operating performance compared to their industry starts to deteriorate imme-
diately after the event with a ROA difference between issuers and non-issuers of −5.05% at t = 0 and
−7.30% at t + 6 months. This negative performance is sustained for the entire subsequent 3-year period
reaching an excess ROA of −8.47% (z-statistic value of −9.552) at t + 36 months after the issue. The only
time issuers improve their ROA performance slightly is at t + 24 and t + 12. However, this excess per-
formance is still negative in terms of economic and statistical significance. The worst performance
differential for issuers is reported against the median operating performance of the B/M matching-
portfolios with −6.58% at t = 0 and a subsequent deterioration up to the end of the post-event examined
period of −9.56% at t + 36 months.
The results for the Net Profit Margin measure produce a similar picture to that for the outcomes for
ROA. On average, compared to the industry benchmark the excess median operating performance for
issuers is negative for all 36 months after the event ranging from a minimum underperformance of
−10.12% at t + 24 to a maximum −36.15% at t + 36 months. The reported z-statistic values are −4.399
and −7.417, both significant at the 1% level. Similar results are reported when issuers’ post-event Net
Profit Margin performance is compared to the remaining three comparison groups, momentum, size and
Table 5
Post-issue abnormal operating performance for SEO companies.
Industry-matched Momentum-matched Size-matched B/M-matched

C j
Growth in turnover (A Ti,t = Ti,t − Ti,t )
t=0 86.66% (−11.73** ) 86.73% (−11.26** ) 87.34% (−11.23** ) 84.38% (−8.95** )
t+6 55.76% (−13.36** ) 55.39% (−12.68** ) 55.97% (−12.32** ) 53.22% (−10.43** )
t + 12 133.16% (−16.44** ) 133.12% (−16.35** ) 133.70% (−15.51** ) 131.20% (−14.64** )
t + 18 245.12% (−19.89** ) 245.65% (−20.19** ) 246.04% (−19.33** ) 243.88% (−18.98** )
t + 24 169.62% (−20.16** ) 172.44% (−20.73** ) 172.86% (−19.96** ) 171.10% (−19.79** )
t + 30 36.74% (−17.15** ) 39.05% (−17.01** ) 39.56% (−16.52** ) 37.91% (−16.03** )
t + 36 17.02% (−12.03** ) 19.35% (−11.67** ) 20.03% (−11.94** ) 18.50% (−10.77** )
C j
Growth in Earnings Before Tax (AEBTi,t = EBTi,t − EBTi,t )
t=0 16.12% (−2.26* ) 15.22% (−1.33) 17.84% (−1.89) 12.43% (−0.64)
t+6 −2.74% (−3.61** ) −1.09% (−3.30** ) 0.75% (−3.42** ) −4.31% (−2.64** )
t + 12 −28.10% (−4.84 )**
−26.81% (−4.82** ) −25.91% (−4.60** ) −30.81% (−3.71** )
t + 18 −31.04% (−7.10** ) −29.96% (−7.20** ) −30.54% (−7.00** ) −34.37% (−6.22** )
t + 24 −54.50% (−4.30** ) −53.44% (−4.64** ) −54.51% (−4.22** ) −57.32% (−3.81** )
t + 30 −67.02% (−1.47) −67.79% (−1.59) −68.79% (−1.17) −71.23% (−0.86)
t + 36 8.24% (−0.04) 5.19% (−0.9) 4.66% (−0.60) 2.01% (−1.31)
L j
Net Profit Margin (ANPMi,t = NPMi,t − NPMi,t )
t=0 −22.90% (−7.59** ) −22.54% (−7.63** ) −22.52% (−7.85** ) −22.86% (−9.40** )
t+6 −30.03% (−7.45** ) −29.39% (−8.33** ) −29.37% (−7.54** ) −29.83% (−10.12** )
t + 12 −26.45% (−6.09** ) −26.01% (−7.40** ) −25.92% (−6.05** ) −26.47% (−8.85** )
t + 18 −15.16% (−4.59** ) −14.84% (−5.59** ) −14.59% (−3.60** ) −15.23% (−6.77** )
t + 24 −10.12% (−4.40** ) −10.89% (−4.97** ) −10.54% (−2.77** ) −11.17% (−5.62** )
t + 30 −22.35% (−6.25** ) −23.25% (−6.22** ) −22.95% (−4.53** ) −23.48% (−6.55** )
t + 36 −36.15% (−7.42** ) −37.01% (−7.42** ) −36.73% (−5.66** ) −37.17% (−7.38** )
j
Return on Assets (AROALi,t = ROAi,t − ROAi,t )
t=0 −5.05% (−9.87** ) −4.94% (−9.82** ) −4.95% (−10.74** ) −6.58% (−17.05** )
t+6 −7.30% (−9.46** ) −7.16% (−10.96** ) −7.11% (−10.14** ) −8.97% (−18.60** )
t + 12 −6.81% (−10.85** ) −6.65% (−12.84** ) −6.48% (−10.84** ) −8.52% (−20.61** )
t + 18 −7.42% (−9.16** ) −7.35% (−11.53** ) −7.04% (−8.39** ) −9.00% (−18.35** )
t + 24 −5.67% (−7.02** ) −5.60% (−8.57** ) −5.23% (−5.78** ) −7.04% (−13.96** )
t + 30 −7.46% (−7.92** ) −7.31% (−8.58** ) −6.98% (−6.33** ) −8.62% (−12.91** )
t + 36 −8.47% (−9.55** ) −8.28% (−9.47** ) −8.04% (−7.74** ) −9.56% (−13.85** )
j
Growth in fixed assets (A FACi,t = FAi,t − FAi,t )
t=0 228.15% (−12.42** ) 229.13% (−12.70** ) 229.19% (−12.49** ) 227.09% (−11.14** )
t+6 255.37% (−12.78** ) 256.45% (−13.21** ) 256.60% (−12.56** ) 253.76% (−11.18** )
t + 12 193.44% (−17.73** ) 194.12% (−17.86** ) 194.55% (−16.83** ) 191.15% (−15.79** )
t + 18 196.20% (−21.00** ) 197.02% (−21.71** ) 197.52% (−20.55** ) 194.26% (−19.87** )
t + 24 158.37% (−17.24** ) 158.90% (−17.59** ) 159.45% (−16.95** ) 156.70% (−15.60** )
t + 30 127.94% (−10.93** ) 129.01% (−11.08** ) 129.57% (−10.67** ) 127.66% (−9.76** )
t + 36 82.25% (−8.10** ) 82.50% (−7.85** ) 83.05% (−7.72** ) 81.62% (−6.88** )
This table reports the difference between the operating performance of SEO companies and the median operating performance
of a matching-portfolio comprised of non-issuing companies of similar industrial classification, momentum, size and book-to-
market value of equity (B/M) characteristics for the month of the equity issue and up to 36 months afterwards. All companies
that recorded an SEO or IPO in the period of t − 36 months prior to the event are excluded from the control portfolios to avoid ex
post selection bias. The Return on Assets (ROA) indicator is estimated as Earnings Before Tax (EBT) divided by the total book value
of assets. Net Profit Margin is estimated as annual EBT divided by annual Turnover. Growth in Earnings Before Tax, Net Profit Margin
and ROA are used as proxies for a company’s profitability. The Growth in Turnover is used as a proxy for past cash generating ability
and growth. The Growth in Fixed Assets indicator is used as a proxy for excessive spending/aggressive investments (increased
trend) as well as the possible failure to utilise successfully the cash raised after the SEO event (sharp decrease). Statistical
significance is determined by calculating the Wilcoxon Sign Rank Sum Test that examines the null hypothesis that these related
samples are drawn from the same distribution. Statistical values are reported in parentheses.
*
**
B/M. Overall, both performance measures are supportive of the hypothesis that post-event financial
underperformance is associated with a slowdown in operational performance for issuers.
The results for growth in Turnover and EBT measures show that the average post-rights issue abnor-
mal increase in Turnover is positive for issuers compared to the median growth in Turnover for all other
control-benchmarks and for all periods under examination inclusive of the month of the issue. For
example, in the month of the event, compared to their industry rivals issuers are reporting an abnor-
mal median increase in sales of 86.66% (z-statistic value of −11.728). This upward trend in excess sales
continues up to t + 24, while from t + 30 and up to the end of the 3-year post-issue examination period
there is a profound slowdown. However, despite this increase in Turnover, EBT growth deteriorates year
by year. Apart from a positive average excess growth in EBT reported in the month of the rights issue,
issuers’ profitability starts to decline steadily up to t + 30 months after the event and again improves at
the end of the k-month holding period. In contrast to the Turnover growth, the results for EBT growth are
statistically significant up to t + 24 months after the event and statistically insignificant thereafter. This
may indicate the presence of extreme negative values in the issuers’ sample for the period after t + 24.
The hypothesis of managers’ overconfidence is corroborated by the results of the Growth in Fixed
Assets indicator. Prior and post-rights issue excess growth in fixed assets is reported to be strongly
positive in both economic and statistical terms. On average, issuers double the level of their fixed
assets from period t = 0 to t + 18, while from the period of 2-year onwards the excess median increase
in issuers’ fixed assets, although still excessive compared to the industry-, momentum-, size- and B/M-
control benchmarks, starts to decline. This average deterioration of operating performance for issuers
is also illustrated in Fig. 3. Compared to the median operating performance of their corresponding
industry, even if issuers on average generate maximum turnover for the first 2 years following the
offering, they eventually ‘burn out’ with an abrupt collapse of their sales at time t + 30 months and a
subsequent deterioration of their operating performance as a whole.
Overall, this evidence is consistent with the window of opportunity and managers’ over-
optimism/‘empire-building’ hypotheses discussed in prior studies for the US market (Jung et al., 1996;
Loughran & Ritter, 1997) and the Dutch market (Kabir & Roosenboom, 2003).
5.2. Operating performance compared to ‘Best’ and ‘Worst’ post-issue market performing companies
While the above results produce an aggregate picture of performance deterioration for all rights
issuers compared to their industry, they fail to distinguish between the positive and negative post-
issue performances. So, if the deterioration in operating performance is robust and the market correctly
anticipates this condition, post-issue operating underperformance differentials will be more distinct
between the two clusters of post-issue market underperforming and outperforming companies. In
such a case, post-offering market outperforming companies should exhibit an improvement in their
operating performance or at least their excess operating performance should be in line with the indus-
trial median. On the other hand, worst market performing issuers are expected to record a persistent
fall in profitability measures immediately after the issue while the inefficient allocation of issued
funds will be reflected in the excessive increase in investments in fixed assets in the early months and
a consistent deterioration thereafter.
The decision to classify one company in one or another cluster is based on the post-event k = 6–36
months BHARs compared to their market industry which includes their immediate business rivals.
From the entire sample of 1542 rights issues examined in the study, only 234 issues are associated
with a consistently positive abnormal performance. This represents 15.2% of the examined sample.
Similarly, the Worst performing cluster consists of 559 rights issues or 36.35% of the sample. These
are issuers that reported the largest negative BHARs subsequent to their equity offering. To establish
a common scale between these two groups in terms of operating performance, their performance
measures are adjusted by the median operating performance of their corresponding industry using a
similar procedure to that outlined earlier and for all post-issue periods k = 0, 6, . . ., 36 months.
The assessment of statistical significance for the difference in excess median operating performance
is estimated using the Wilcoxon matched-pairs signed rank procedure, which tests the hypothesis that
the measured excess operating performance for both the Best and Worst market performance samples
is drawn from identical distributions.
206
Fig. 3. Abnormal operating performance for issuers against corresponding matching-portfolios bases on industry, momentum, size and B/M.
This figure illustrates the excess/abnormal operating performance of equity issuers compared to the median operating performance of a corresponding portfolio of companies with a
similar industrial classification and, momentum, size and book-to-market value of equity (B/M) characteristics excluding those companies that recorded an SEO or IPO in the period of
t − 36 months prior to the event. Growth in Earnings Before Tax, Net Profit Margin and ROA indicators are all used as proxies for a company’s profitability while, the Growth in Turnover
measure is used as a proxy for past cash generating ability and growth. The Growth in Fixed Assets indicator is used as a proxy for excessive spending/aggressive investments (increased
trend) as well as the possible failure successfully to utilize the raised capital after the SEO event (sharp decrease).
Table 6
Comparison of average median-excess operating performance between issuers that reported the ‘Best’ and ‘Worst’ BHARs against
their corresponding industry.
t=0 t+6 t + 12 t + 18 t + 24 t + 30 t + 36
Growth in turnover
Best 0.312 0.339 0.718 0.858 0.650 0.428 0.295
Worst 1.640 0.673 1.710 2.728 1.847 0.188 0.084
z-Statistic# −2.085c , * −1.658c −0.607c −1.574b −3.708b , ** −3.875b , ** −5.298b , **
Growth in EBTa
Best 0.907 1.006 0.757 1.937 1.565 0.815 0.295
Worst −0.366 0.497 0.055 −0.350 −0.927 −1.873 −0.273
z-Statistic# −0.101b −0.863c −0.136c −3.858b , ** −5.684b , ** −4.808b , ** −5.295b , **
Net Profit Margin

Best −0.055 −0.083 −0.023 −0.012 −0.018 0.032 −0.294
Worst −0.173 −0.203 −0.215 −0.224 −0.224 −0.467 −0.535
z-Statistic# −2.033b , * −3.003b , ** −4.204b , ** −6.673b , ** −8.122b , ** −8.507b , ** −9.087b , **
Return on Assets
Best −0.028 −0.031 −0.030 −0.018 0.005 0.014 0.013
Worst −0.074 −0.147 −0.087 −0.127 −0.091 −0.145 −0.129
z-Statistic# −3.063b , ** −3.202b , ** −3.399b , ** −5.935b , ** −8.048b , ** −9.064b , ** −8.840b , **
Growth in fixed assets

Best 0.728 0.641 0.878 1.260 0.845 0.350 0.901
Worst 2.521 3.731 3.194 2.065 1.930 1.667 0.105
z-Statistic#
−2.148c , * −0.808c −0.367c −1.175b −2.575b , ** −5.163b , ** −6.145b , **
This table summarise the excess median operating performance of all companies issuing equity in the form of rights issues in
the UK for the period January 1988–December 1998 compared to their industry matching-portfolio. From the total examined
sample of 1542 rights issues, 234 issues (15.2% of the sample) are classified as Best performers in terms of post-issue market
out-performance compared to their industry median. Similarly, 559 issues (36.4% of the sample) are associated with companies
that exhibited extreme negative market performance compared to their industry median. These issuers are classified as Worst.
The z-statistics reported are estimated using the Wilcoxon Signed Rank test, which examines both sample groups for identical
distributions.
a
EBT stands for Earnings Before Tax.
b
Based on positive ranks.
c
Based on negative ranks.
*
**
#
Significantly different from the theoretical significance level at the 5% level, two-sided binomial test statistic.
Table 6 and Fig. 4 report the results for these Best and Worst clusters. On average, and for all mea-
sures, the Worst cluster reports a continuous deterioration in operating performance compared to
the Best group. The industry-excess growth in Turnover measure following the issue of equity for
both groups is positive for all periods. However, the growth in Turnover for the Worst group is far
more volatile and in general supportive of the hypothesis discussed earlier that issuers with excessive
growth and overoptimistic management may soon experience a sharp decline in fundamentals caused
by inefficient allocation of invested funds and the outcomes of possibly inappropriate decision mak-
ing. Regarding the excess EBT growth indicator for the worst performing cluster, the t + 6 post-issue
positive excess performance of 49.7% is soon followed by a consistent underperformance for the next
2 years. However, for the Best cluster the industry-excess growth in earnings is consistently positive
for the entire post-offering period with the largest excess growth in EBT of 193.7% and 156.5% reported
at t + 18 and t + 24 months after the event.
The results for the ROA, Net Profit Margin and Growth in Fixed Assets are also strongly supportive of
the link between post issue operating performance and market returns. Following a period of negative
ROA performance the Best cluster finally reverts back to positive industry-excess profitability levels
approximately 2 years following the rights issue in contrast to the Worst group of companies where
the excess ROA is consistently below their industrial median.
208
Fig. 4. Excess operating performance for issuers that reported the ‘Best’ and ‘Worst’ k-month BHARs compared to their industry.
This figure illustrates the excess median operating performance of the ‘Best’ and ‘Worst’ clusters of equity issuers compared to their industry matching-portfolio. In detail, from the total
examined sample of 1542 rights issues, 234 issues (15.2% of the sample) are classified as Best performers in terms of post-issue market out-performance compared to their industry. Similarly,
559 issues (36.4% of the sample) are associated with companies that exhibited extreme negative market performance compared to their industry. These issuers are classified as Worst. The
examination of these two clusters improves accuracy on the estimation of the asymmetric effect of the operating performance deterioration following the issuing event between these
post-event top and bottom market performers.
As regards the excess Net Profit Margin measure, both groups are reported to be below the industry’s
median. However, the Best group of issuers shows some significant improvement from t + 12 onwards
and a large reversion at the end of the examined post-issue period. Finally, a comparison of the excess
growth in Fixed Assets confirms the earlier aggregate results. The Worst post-issue performers exhibit a
continuous twofold and threefold increase in their fixed assets compared to their industrial medians,
but this soon ‘dries out’ and reverts to a growth level that is in line with the industry’s median at
the end of the examined period. On the other hand, Best performing issuers exhibit a consistent but
positive excess growth throughout the entire period under examination. Most of the above results are
statistically significant at the 1% level.
Overall, these results indicate that post-issue operating performance is one of the key determinants
of the ‘equity-issue effect’, unanimously documented in both UK and US markets.11 Additionally, the
results of the Best and Worst clusters are also in line with Loughran and Ritter’s (1997) argument that
fast-growing companies, as indicated by the turnover growth and growth in fixed assets at t = 0, are the
ones that exhibit lower subsequent stock returns.
6. Summary and conclusions
Using a sample of 1542 rights issues in the UK market for the period January 1988–December
1998, this study examines the relationship between equity issuers’ market performance and operat-
ing performance for 36 months following the event. In line with prior studies in the UK and abroad
(Ho, 2005; Jegadeesh, 2000; Levis, 1995; Loughran & Ritter, 1995, 2000; Ngatuni et al., 2007; Spiess
& Affleck-Graves, 1995; Suzuki, 2000) the results reported here indicate that, on average, compa-
nies raising capital in the form of rights issues consistently under-perform their non issuing peers
during the entire post-issue period under examination and for all k-months buy and hold strate-
gies. This underperformance is found to be robust using a variety of alternative control benchmarks
based on industry, momentum, size and book-to-market value of equity (B/M) micro-characteristics.
From all four control-benchmarks, only industry classification is better at successfully explaining
issuers’ long-term underperformance. For example, compared to a momentum-, size-, and, B/M-based
portfolio-matching methodology where equity issuers report an average abnormal loss of 24.39%,
24.21% and 26.20% respectively, the results based on industrial classification produce an average abnor-
mal loss of only 17.89%. This result indicates that to some degree, post-issue market underperformance
is driven by industry performance. In general, given this evidence the study concludes that long-term
underperformance following rights issues is robust and persistent across all industries and years under
examination and further corroborates the evidence presented in earlier studies on SEOs in the UK using
alternative methodologies (Ho, 2005; Levis, 1995; Ngatuni et al., 2007; Suzuki, 2000).
The examination of post-issue operating performance provides evidence supportive of the ‘infor-
mation asymmetry’ and managers’ overconfidence/‘empire-building’ hypotheses. Under conditions of
market efficiency, a gradual fall in market performance caused by an equity issue event should reflect
a relative and continuous fall, or an expectation of a fall, in the fundamental value of these compa-
nies and in their ability to sustain future superior performance compared to their competitors. Using
alternative ‘level’ and ‘change’ indicators that aim to monitor post-event operating performance, this
study reports an economically and statistically significant deterioration in the underlying operating
performance of issuers in the post-event period. Compared to all control-benchmarks used, SEO com-
panies demonstrate a continuous decline in profitability measured by the median growth in Earnings
Before Tax, the Net Profit Margin and Return on Assets indicators. By combining these results with
the median growth in issuers’ turnover for the post-event period, there is evidence of high operating
volatility characterized by sharp increases in turnover at the expense of their profitability. Similarly,
the results for median growth in fixed assets are supportive of the managers’ overconfidence hypoth-
esis as defined by Jung et al. (1996). In the immediate period after the offering the median growth
in fixed assets for issuers increases from 228.15% to 255.37% while as soon as profitability starts to
11
A similar trend in the post-event operating performance for the Best and Worst clusters of equity issuers is evidenced from
the use of the momentum, B/M and size benchmarks. A summary of these results is presented in Appendix B.
decline the fixed assets growth starts to deteriorate, leading to a median growth of 82.25% at t + 36
months after the issue. Clustering all issuers into two groups of Best and Worst post-event market
performers show that the aggregate operating deterioration reported is asymmetric between the two
groups with the former cluster of issuers reversing their profitability levels within 2 years following
the issuing event, while the latter cluster of companies continue to under-perform throughout the
entire examined period after the event.
Therefore, we can conclude that although these results are robust for equity rights issues carried
out by fast-growing companies with over-optimistic management, a cluster of companies can exhibit
constant profitability and efficient allocation of resources and generate far superior profits for their
shareholders on a consistent basis. It is therefore investors who need to be able to distinguish one
company from another and allocate their funds accordingly. The evidence reported here proposes that,
in average terms, investors fail to make this distinction. An accurate determination prior to the event
of which of these firms will end up in the second cluster is an issue to be answered in future research.
Acknowledgments
The author would like to thank Arief Daynes, David Crowther, Peter Scott and participants in
the ATINER 2007 International Conference in Business Finance for their valuable comments. He also
acknowledges support in the form of a bursary from the Committee of the Heads of Accounting (CHA)
that enabled this research to be completed. He is also grateful to the two anonymous referees for their
constructive comments and suggestions that helped improve the paper.
Appendix A
Number of rights issues included in the sample and industrial classification.
Industry cycle n
Bricks and roofing tiles 2

Builders merchants 7
Building materials 26
Business support services 1
Clothing 19
Computer software 1
Consultancies and agencies 10
Contracting and construction 57
Cotton and synthetics 1
Departmental stores 1
Discount houses 1
Education and business training 1
Electrical 17
Electronics 37
Food manufacturers 35
Food retailers 16
Founders and stampers 2
Founders and stampers/aerospace 4
Furniture and furnishing 6
General chemicals 23
General food 7
General traders, wholesalers and distributors 4
Giftware 4
Gold 2
Health and household 13
Hire purchase 4
Hotels and caterers 15
Household appliances 1
Industrial and holdings companies 15
Industrial conglomerates 18
Industrial materials and capital goods 12
Industrial plant, engines and compressors 14
Industry cycle n
Instruments 3
Insurance brokers 7
Kitchen and tableware 3
Laundries and cleaners 1
Leather 7
Machine and other tools 10
Mail order stores 2
Mechanical handling 9
Media agencies 19
Metallurgy 9
Mining finance 3
Miscellaneous 41
Miscellaneous engineering contractors 3
Miscellaneous financial 20
Miscellaneous mechanical engineering 48
Miscellaneous metal forming 5
Miscellaneous mines and collieries 5
Miscellaneous textiles 22
Motor components 15
Motor distributors 17
Motor vehicles 2
Multiple stores 30
Office equipment 8
Overseas trade 5
Packaging and paper 16
Personal and household care 1
Plastic and rubber 5
Property agencies 2
Publishing/newspapers and periodicals 7
Pumps and valves 2
Radio and TV 2
Radio and TV/broadcasting contractors 3
Rubber 3
Security and alarms 9
Special steels 4
Steel and chemical plant 3
Timber 1
Tin 2
Transport and freight 15
Wines and spirits 3
Wool 7
Automobiles (ex. engineering, vehicles) 3a
Beverages (ex. spirits, wines and ciders) 1a
Breweries 11a
Breweries, pubs and restaurants 11a
Building and construction 34a
Building materials and merchants 31a
Chemicals 15a
Construction and building materials (ex. BM and merchants) 2a
Distributors 48a
Diversified industrials 7a
Electricity 1a
Electronic and electrical equipment 34a
Engineering 56a
Engineering and machinery 4a
Engineering, vehicles 6a
Extractive industries 13a
Food producers and processors (ex. food manufacturers) 1a
Furnishing stores 2a
Gas distribution 1a
Health (ex. health care) 2a
Health care 20a
Household goods 6a
Household goods and textiles 3a
Industry cycle n
Leisure 29a
Leisure and hotels 30a
Leisure, entertainment and hotels (ex. leisure and hotels) 3a
Media 22a
Media and photography (ex. media) 11a
Mining (ex. extractive industries) 2a
Oil and gas 34a
Oil exploration and production 18a
Other financial 13a
Other services and business 5a
Packaging (ex. printing, paper and packaging) 1a
Pharmaceuticals 13a
Printing, paper and packaging 27a
Property 117a
Real estate (ex. property) 10a
Retailers, food 4a
Retailers, general 20a
Speciality and other finance (ex. other financial) 3a
Spirits, wines and ciders 1a
Support services 53a
Telecommunications 1a
Textiles and apparel 28a
Transport 18a
Total rights issues 1542
This table describes the distribution of the sample of rights issues in terms of industrial classification (Industry Cycles). This
information is extracted from the UK Equity Database (UKED). All sector information has been hand-collected and manually
extracted from archive material including the Financial Times, Hemscott Company Guide and its more recent manifestations,
the Lehman Communications Company Guide and Pinsent Company Guide. The primary source for these records is the FTSE
Actuaries Industry Classification System, compiled and administered by FTSE International in association with the Institute of
Actuaries and the Faculty of Actuaries. All information is free from survivorship and look-ahead biases and is considered to be
an accurate and complete picture of the UK market’s industry structure for the period January 1988 to December 1998.
a
FTSE Actuarial Classification System since the 1st of January 1994.
Appendix B
Assessing robustness on ‘Best’ and ‘Worst’ Clusters’ post-event operating performance results using
alternative control benchmarks: summary of results
Panel A: comparison of average median-excess operating performance between issuers that reported the Best and Worst
BHARs against their corresponding B/M decile portfolio
t=0 t+6 t + 12 t + 18 t + 24 t + 30 t + 36
Growth in turnover
Best 0.3457 0.3694 0.7973 0.9096 0.5992 0.4600 0.2855
Worst 1.5687 0.6306 1.5625 1.6313 0.7682 0.1438 0.0826
z-Statistic# −1.604c −2.096c −0.646b −1.331b −2.523b,* −3.894b,** −4.658b,**
Growth in EBTa
Best 0.6484 0.5894 0.3426 1.5810 1.2077 0.9581 0.6030
Worst −0.8088 −0.1640 −0.9916 −2.3209 −1.8195 −1.4786 −0.3729
z-Statistic# −0.061c −0.627c −0.398b −2.898b,** −4.409b,** −5.365b,** −5.733b,**
Net Profit Margin

Best −0.0512 −0.1017 −0.0168 −0.0013 −0.0211 −0.0148 −0.3949
Worst −0.1613 −0.2474 −0.2426 −0.2278 −0.2247 −0.4777 −0.5008
z-Statistic# −0.681b −1.101b −2.605b,** −5.218b,** −5.915b,** −7.136b,** −7.262b,**
Return on Assets
Best −0.0401 −0.0512 −0.0499 −0.0340 −0.0067 0.0013 0.0044
Worst −0.0816 −0.1475 −0.1065 −0.1483 −0.1264 −0.1713 −0.1720
z-Statistic# −1.668b −1.383b −1.810b −5.003b,** −6.363b,** −7.159b,** −7.579b,**

Panel A: comparison of average median-excess operating performance between issuers that reported the Best and Worst
BHARs against their corresponding B/M decile portfolio
t=0 t+6 t + 12 t + 18 t + 24 t + 30 t + 36
Best 2.1209 1.9573 0.9095 1.2067 0.6192 0.3510 0.4272

Worst 1.9863 2.9728 2.8325 1.8863 1.6824 2.8052 1.4607
z-Statistic# −1.763c −1.313c −0.200b −0.686b −0.174b −3.347b,** −5.254b,**
This table summarises the excess median operating performance of all companies issuing equity in the form of rights issues
in the UK for the period January 1988–December 1998 compared to their B/M matching-portfolio. From the total examined
out-performance compared to the median operating performance of their corresponding B/M decile-portfolio. Similarly, 595
issues (38.58% of the sample) are associated with companies that exhibited a negative market performance compared to the
median operating performance of their corresponding B/M decile-portfolio. These issuers are classified as Worst. The z-statistics
reported are estimated using the Wilcoxon Signed Rank test which examines both sample groups for identical distributions.
a
b
c
*
**
#
Panel B: Comparison of average median-excess operating performance between issuers that reported the Best and Worst
BHARs against their corresponding momentum decile-portfolio
t=0 t+6 t + 12 t + 18 t + 24 t + 30 t + 36
Growth in turnover
Best 0.3512 0.2897 0.6601 0.8303 0.5129 0.3663 0.2521
Worst 1.4790 0.6587 1.6156 1.6859 0.8131 0.2031 0.1315
z-Statistic# −1.797c −2.305c,* −0.757c −0.946b −2.246b,* −3.250b,** −4.321b,**
Growth in EBTa
Best 0.4444 0.6035 0.8983 1.5835 1.2546 0.8653 0.5192
Worst −0.7205 −0.0068 −0.6896 −2.1021 −1.9005 −1.9873 −0.7911
z-Statistic# −0.507c −0.703c −0.135b −3.807b,** −4.951b,** −4.754b,** −4.748b,**
Net Profit Margin

Best 0.0045 −0.0399 −0.0224 −0.0091 −0.0180 −0.0087 −0.3573
Worst −0.1599 −0.2486 −0.2405 −0.2163 −0.2161 −0.4238 −0.4387
z-Statistic# −0.398b −1.639b −2.851b,** −4.853b,** −6.714b,** −7.542b,** −7.674b,**
Return on Assets
Best −0.0116 −0.0340 −0.0386 −0.0275 0.0120 0.0185 0.0201
Worst −0.0624 −0.1342 −0.0895 −0.1379 −0.1228 −0.1640 −0.1599
z-Statistic# −2.651b,** −2.842b,** −3.272b,** −5.644b,** −7.468b,** −7.924b,** −8.164b,**

Best 1.8345 1.8165 0.8431 1.1073 0.5841 0.3297 0.3560
Worst 2.0576 3.1645 3.0162 1.9844 1.7679 2.8359 1.4765
z-Statistic#
−2.768c,** −2.195c,* −0.756c −0.114b −0.340b −3.522b,** −5.059b,**
This table summarises the excess median operating performance of all companies issuing equity in the form of rights issues in
the UK for the period January 1988–December 1998 compared to their momentum matching-portfolio. From the total examined
out-performance compared to the median operating performance of their corresponding momentum decile-portfolio. Similarly,
599 issues (38.84% of the sample) are associated with companies that exhibited a negative market performance compared to the
median operating performance of their corresponding momentum decile. These issuers are classified as Worst. The z-statistics
reported are estimated using the Wilcoxon Signed Rank test, which examines both sample groups for identical distributions.
a
b
c
*
**
#
Panel C: comparison of average median-excess operating performance between issuers that reported the Best and Worst
BHARs against their corresponding size decile-portfolio
t=0 t+6 t + 12 t + 18 t + 24 t + 30 t + 36
Growth in turnover
Best 0.3419 0.3787 0.4498 0.5358 0.6061 0.3807 0.2761
Worst 1.7106 0.6889 1.2568 1.3094 0.3562 0.1891 0.1188
z-Statistic# −1.373c −1.572c −1.233c −0.545b −1.708b −2.717b,** −3.602b,**
Growth in EBTa
Best 1.3447 2.1988 1.3418 1.5082 1.0468 0.6852 0.4970
Worst −0.5188 −0.0751 −0.4229 −1.8280 −1.9473 −2.0109 −0.6676
z-Statistic# −0.104b −0.199b −0.800b −2.383b,* −4.039b,** −5.329b,** −4.760b,**
Net Profit Margin

Best 0.0234 −0.0280 −0.0032 0.0248 0.0018 0.0050 −0.3913
Worst −0.1295 −0.2216 −0.2336 −0.2176 −0.2048 −0.4739 −0.4938
z-Statistic#
−1.186b −2.406b,* −3.549b,** −5.546b,** −7.280b,** −7.840b,** −7.797b,**
Return on Assets
Best −0.0128 −0.0247 −0.0187 0.0094 0.0298 0.0338 0.0320
Worst −0.0689 −0.1328 −0.0831 −0.1324 −0.1149 −0.1599 −0.1614
z-Statistic# −3.099b,** −2.853b,** −3.069b,** −5.881b,** −7.285b,** −8.127b,** −8.223b,**

Best 2.0862 1.9328 0.5706 0.8334 0.8018 0.3372 0.3704
Worst 2.1304 2.9606 2.8036 2.0279 1.8247 3.0367 1.5711
z-Statistic# −1.099c −0.922c −0.731c −0.083b −1.053b −2.860b,** −4.452b,**
This table summarises the excess median operating performance of all companies issuing equity in the form of rights issues
in the UK for the period January 1988 to December 1998 compared to their size matching-portfolio. From the total examined
out-performance compared to the median operating performance of their corresponding size decile-portfolio. Similarly, 561
issues (36.38% of the sample) are associated with companies that exhibited a negative market performance compared to the
median operating performance of their corresponding size decile. These issuers are classified as Worst. The z-statistics reported
are estimated using the Wilcoxon Signed Rank test, which examines both sample groups for identical distributions.
a
b
c
*
**
#
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Seasoned Equity Offerings, Operating Performance and Overconfidence Evidence From The UK

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Seasoned Equity Offerings, Operating Performance and Overconfidence Evidence From The UK

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Journal of Economics and Business 61 (2009) 189–215

Contents lists available at ScienceDirect

Journal of Economics and Business

Seasoned equity offerings, operating performance and

2. Theoretical background and empirical evidence

Study Date Methodology Sample Pre-SEO Post-SEO

P. Andrikopoulos / Journal of Economics and Business 61 (2009) 189–215

3. Data and methodology

REG ID Deﬁnition Totala Exclb Incc

Other excluded records

Fig. 1. Distribution of sample of rights issues under examination.

BHRi,k = (1 + ri,t ) − 1 (1)

BHARp,i,k = (1 + ri,t ) − 1 − (1 + ri,t ) − 1 (3)

ABHARN,k = BHARp,i,k (4)

using a bootstrapped skewness-adjusted t-statistic methodology introduced by Lyon, Barber, and

L is the abnormal operating performance of ﬁrm i at time t; P is the level of performance of

C is the abnormal operating performance of ﬁrm i at time t; P and P

Panel A: models of expected operating performance

Model Models of excess operating performance Description/comparison group

Panel B: accounting measures of operating performance

Accounting indicator Description

Growth of turnover Deﬁned as the increase in the reported turnover

Industry-matched Momentum-matched Size-matched B/M-matched

BHARk=6 −0.0115 −1.381 −0.0121 −1.512 −0.0165 −2.038 *

4. Post-event market performance for equity issuers

5. Post-event evaluation of operating performance for equity issuers

5.1. Operating performance compared to matching-portfolios’ median

Industry-matched Momentum-matched Size-matched B/M-matched

Net Proﬁt Margin

Growth in ﬁxed assets

6. Summary and conclusions

Number of rights issues included in the sample and industrial classiﬁcation.

Bricks and rooﬁng tiles 2

Net Proﬁt Margin

Growth in ﬁxed assets

Best 2.1209 1.9573 0.9095 1.2067 0.6192 0.3510 0.4272

Net Proﬁt Margin

Growth in ﬁxed assets

Net Proﬁt Margin

Growth in ﬁxed assets

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