Is the Market Over-Optimistic About the Prospects of Firms that Issue Equity? Evidence for the Spanish Market

28 Pages Posted: 7 Feb 2004

See all articles by Maria J. Pastor-Llorca

Maria J. Pastor-Llorca

University of Alicante

J. Carlos Gómez Sala

University of Alicante - Department of Financial Economics

Abstract

Previous evidence has documented that equity issuers underperform in the long-run. One possible explanation is that investors have over-optimistic expectations regarding future earnings and the underperformance occurs as these expectations are corrected over time. Our central focus is to test this hypothesis for Spanish rights issuing firms, for that firstly, we examine analysts' predictions about furture earnings of these companies. We observe that forecasts are unusually favourable and, moreover, the post-offering underperformance is most pronounced when analyst predictions have higher optimistic bias. Secondly, we study the market response to issuing firms' earnings announcements in the post-offering period observing a significant negative reaction. So the evidence in this paper is consistent with the excessive optimism hypothesis about issuing firms.

Keywords: Corporate finance, seasoned equity offerings, earnings forecasting

Suggested Citation

Pastor-Llorca, Maria J. and Gomez Sala, Juan Carlos, Is the Market Over-Optimistic About the Prospects of Firms that Issue Equity? Evidence for the Spanish Market. Available at SSRN: https://ssrn.com/abstract=499885 or http://dx.doi.org/10.2139/ssrn.499885

Maria J. Pastor-Llorca

University of Alicante ( email )

Campus de San Vicente
Carretera San Vicente del Raspeig
San Vicente del Raspeig, 03690
Spain

Juan Carlos Gomez Sala

University of Alicante - Department of Financial Economics ( email )

Ctra. S. Vicente s/n
03690-S. Vicente del Raspeig
Alicante, San Vicente del Raspeig - Alicante 03690
Spain
+34 965909309 (Phone)
+34 965903621 (Fax)