The Long-Run Performance of Stock Returns Following Debt Offerings

We document that firms making straight and convertible debt offerings during 1975-1989 substantially underperformed samples of non-issuing control firms matched on size and book-to-market ratio. This evidence of long-run underperformance following debt offerings is not consistent with the management timing hypothesis, since managers would sell equity, rather than debt, if they could anticipate post-issue underperformance. Instead, our results support the Miller and Rock (1985) theory that all security issues convey negative information to stockholders. As with equity offerings and repurchases, the market appears to underreact at the time of the debt offering announcement so that the full impact of the offering is realized over a longer time horizon.

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