LONG-RUN SEASONED EQUITY OFFERING RETURNS

LONG-RUN SEASONED EQUITY OFFERING RETURNS:
DATA SNOOPING, MODEL MISSPECIFICATION, OR MISPRICING?
A COSTLY ARBITRAGE APPROACH (55 pgs)

by
Jeffrey Pontiff
Michael J. Schill

ABSTRACT
This paper uses a new approach to assess return behavior after seasoned equity offerings. Our approach recognizes that sophisticated investors are motivated to correct mispricing, although the magnitude of their activity is influenced by arbitrage costs. This approach avoids inference problems due to model misspecification or data snooping. The evidence supports the contention
that firms that conduct seasoned equity offerings are overpriced. Our findings imply that, since mispricing associated with seasoned equity offerings is persistent in the long-run, holding costs play an important role although transaction costs do not. In fact, holding costs dominate the size effect documented by previous research.
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