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Market Gaming? An Examination Of Aggregate Equity Issue Clustering

This paper is available in a repository.
This paper is available in a repository.

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Preprint: policy unknown
Question mark in circle
Postprint: policy unknown
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Abstract

Studies of the long-run returns of equity issues find that the poor performance of new issues is common to non-issuers with similar characteristics. This paper examines the view that such evidence suggests that managers game long-run returns of the total market and their respective industry when timing new equity issues. This form of the timing hypothesis is modeled formally to motivate the empirical tests. Using aggregate new equity offering volume from 1970 to 1993, the empirical evidence in this paper supports some forms of successful gaming of market and industry valuation. In particular, the clustering of equity issue volume of small-capitalization firms is found to be strongly correlated with subsequent returns of non-issuing, small-capitalization stocks. Industry results suggest that equity offerings appear to also coincide with peaks in the valuation of their respective industries. The economic gains to such timing behavior are highly significant.