Risk adjustment and the measurement of long-term performance: evidence from Japanese new equity issues

Abstract

Previous studies (Loughran and Ritter, 1994; Spiess and Affleck-Graves, 1995) report that long-run post-offering underperformance is not restricted to IPOs, but is a broader based phenomenon. In this study we test to see if such a pattern is present in the long-term performance of Japanese stocks following the offering of new equity. Using a sample of 650 firms making primary seasoned equity offerings during 1975-1990, and a size and industry matched sample of non-issuing firms, we observe that the post-offering performance of Japanese equities is quite similar to that reported in the U.S. We further find that this underperformance persists across most years of our sample period, even after controlling for firm age, the book-to-market ratio, firm size and industry grouping. We do find however that there is a tendency for greater underperformance by keiretsu firms than independent firms. This finding is consistent with earlier research by Nakatani (1984) and Prowse (1992) who report that keiretsu firms tend to emphasize performance stability rather than the level of earnings or corporate growth. Further, our results are consistent with the contention of Spiess and Affleck-Graves (1995) that managers exploit firm specific information and issue equity when the firm's stock is overvalued.