Ch. 6: Security Offerings 315
The studies form average abnormal returns across a sample ofNissues asARt ≡
( 1 /N )
∑N
i γitand report tests of the hypothesis thatARt=0. Statistical significance is
inferred using either at-statistic for the average, or az-statistic
zt= (4)1
√
N
∑N
j= 1γit
σi,
whereσi is the time series estimate of the standard error ofγit.^34 For large sample
sizeN,thisz-statistic has a standard normal distribution under the null hypothesis of a
zero average abnormal return.
We have organized the evidence on average announcement effects to security of-
ferings in three tables.Table 13covers studies of SEOs by U.S. firms, classified by
the flotation method.Table 14show international evidence on SEOs, again by flotation
methods. We separate U.S. from international studies as the international evidence show
very different results than that of U.S. studies. Third,Table 15show the announcement
effect of straight and convertible debt offerings by U.S. firms.
4.4.1. Market reaction to SEOs in the U.S.
In this section, we highlight four main conclusions from the U.S. evidence. As surveyed
byEckbo and Masulis (1995), the perhaps most striking finding of papers published
in the 1980s is the significantly negative market reaction to firm commitment offerings
by U.S. firms. These papers are shown in Panel (a) ofTable 13. For brevity, the table
pools results for industrial and utility issuers—although it is well known that the market
reaction to industrial issuers is more negative than for utility offerings. For example,
while the two-day average abnormal return averages about−2% across the two issuer
types (using sample-size weights), it averages about−3% for industrials and−1% for
utilities (Asquith and Mullins, 1986; Masulis and Korwar, 1986; Mikkelson and Partch,
1986 ; Korajczyk, Lucas, and McDonald, 1990; Hansen and Crutchley, 1990; Eckbo and
Masulis, 1992). The lower market reaction to utilities is consistent with adverse selec-
tion arguments as utilities generally have less discretion than industrial companies in
timing the issue to short-term overvaluation. The regulatory process reduces discretion
to time the market, either by slowing the issue approval process or by forcing the firm
to issue at times determined in part by the incentives of the regulator.
In 1985, the Wall Street Journal changed its reporting system for SEO announce-
ments with the effect of making it more costly to collect accurate issue announcement
dates for broad, representative samples.^35 This, combined with the very strong infer-
ences made from the earlier studies, probably explains why there is a drop in the
(^34) Some studies reportt-statistics using a cross-sectional estimate of the standard error. SeeKothari and
Warner (2007), Chapter 1of this volume, for a discussion of various event-study procedures.
(^35) Jung, Kim, and Stulz (1996): “Before 1985, the WSJ reports on equity issues as a regular news item.
From 1985, most of the information on new issues is reported in the ‘new securities issues column’ which