CURSE OF THE STOCK ISSUERS?
When publicly traded companies decide to raise capital by offering additional shares to the market, the offerings are often snapped up by investors. Nonetheless, a new study indicates that such stocks fare relatively poorly in the years following their issue.
In an analysis of stock movements from 1970 to 1990, economists Tim Loughran of the University of Iowa and Jay R. Ritter of the University of Illinois found that the stocks of some 2,680 companies issuing additional shares produced average annual returns of 7% in the five years after the offerings. By contrast, shares of similarly capitalized nonissuing companies produced average annual returns of 15.3% a year.
Why the difference? The researchers note that companies typically decide to issue added shares after posting a marked improvement in their performance, and the markets tend to be overly impressed by such improvements. In other words, the sellers expect to get a good deal, and they usually do--to the detriment of myopic investors.BY GENE KORETZ