The effect of analyst coverage and forecasts on seasoned equity offerings’ pricing and long-term performance
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School of Business |
Master's thesis
Authors
Date
2019
Department
Major/Subject
Mcode
Degree programme
Finance
Language
en
Pages
63 + 3
Series
Abstract
The motivation for the study is to produce additional evidence on SEOs. The thesis contributes to the existing literature by supplying empirical evidence on how analyst coverage and analyst forecasts affect the various characteristics in SEOs. In particular, new evidence is provided on how long-term analyst growth forecasts affect underpricing, how analyst forecasts and forecast errors are related to the number of SEOs in the market and finally how analyst coverage, growth forecasts and issue underpricing affect the post-issue long-term stock market performance. The data on seasoned equity offerings utilized in the thesis is collected from the SDC Global New Issues database and consists of US equity common stock offerings made between 1993 and 2013. After various restrictions, the final number of offerings amounts to 2,294. The data on issuers’ stock market attributes, such as stock prices and shares outstanding are retrieved from CRSP and the information on analyst coverage is retrieved from Thomson Reuters IBES. Last, the realized earnings data is retrieved from Compustat. The results indicate that extensive analyst coverage is not linked to the underpricing of the issue. The findings also suggest that higher long-term analyst growth forecasts are related to increased underpricing, suggesting that firms utilize the window of opportunity to issue equity during periods of high stock market valuations and returns. Additionally, higher analyst growth forecasts are related to the number of SEOs in the market, supporting the previous finding of pseudo market timing. Long-term analyst growth forecast errors also increase during times when the number of SEOs in the market is high, and the errors are larger for issuing firms than for non-issuing firms in the same industry. The long-term, a 60-month period post-issue, stock market performance is studied utilizing a CRSP value-weighted benchmark and a matched firm benchmark of which both show that issuers underperform, while the value-weighted benchmark experiences significantly more negative performance. Finally, pre-issue analyst coverage, analyst growth forecasts or issue underpricing seem to have no significant effect on the post-issue stock market performance.Description
Thesis advisor
Puttonen, VesaKeywords
seasoned equity offerings, analyst coverage, analyst forecasts, underpricing, event study, long-term underperformance