“An analysis of the characteristics of firms conducting corporate events inside and outside waves” by Aristotelis STOURAITIS
City University of Hong Kong
Texas Christian University
P. RAGHAVENDRA RAU
We examine whether firms participating in four separate types of corporate events (seasoned equity offerings or SEOs, mergers – both stock and cash-financed, and share repurchases) within waves differ in predictable patterns from firms that engage in event activity outside waves. We also examine whether firm characteristics evolve similarly as event waves progress. Our findings suggest that waves are driven by the availability of growth opportunities and end when these opportunities disappear. We find little evidence that seasoned equity offering waves occur when rational managers try to take advantage of irrationally optimistic markets. These waves are more likely to be driven by managers issuing equity to take advantage of growth opportunities. Stock-financed acquisition waves are likely to be driven by the lack of internal growth opportunities in the firm and the availability of a large pool of targets with growth opportunities. Repurchase waves seem likely to be driven by undervalued firms. The patterns for cash-financed acquisition waves are not as clear, leaving us unable to draw clear conclusions on why these waves occur. In addition, especially for stock-financed acquisitions, the larger, less profitable firms completing events at the end of waves earn significantly lower long-horizon excess returns, suggesting a degree of market misvaluation appears as waves progress.