Common Stock Offerings and Earnings Expectations: A Test of the Release of Unfavorable Information



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    • Finance Department, The Pennsylvania State University, University Park. I wish to thank John Byrd, Kelly Eakin, Michael Hertzel, Michael Hopewell, Coleman Kendall, Omesh Kini, James McKeown, Wayne Mikkelson, George Racette, Philip Shane, Gary Shea, René Stulz, and an anonymous referee for helpful comments on earier drafts. I also thank Lynch, Jones and Ryan, Inc. for providing the data from the Institutional Brokers Estimate System.


This paper examines the revisions of analysts' forecasts of future earnings around announcements of common stock offerings. The forecasts of the current year earnings are, on average, decreased when firms announce plans to issue additional common stock. The size of the decrease is significantly related to announcement period abnormal stock returns. In contrast, forecasts of the five-year growth rate of earnings are, on average, unchanged. We interpret these results as being consistent with the claim that equity offering announcements convey unfavorable information regarding the firm's short-term but not its long-term earnings prospects.