Chapter 9 of North-Holland Handbook of the Economics of Finance edited by George Constantinides, Milton Harris, and René Stulz, forthcoming 2002.

Synopsis

This paper summarizes research analyzing the securities issuance process, with an emphasis on equity issuances. Section 3 and Table 5 of the paper provide a good summary of past research examining the short-run and long-run stock price reactions to corporate financing activities. In general, the patterns suggest that firms distributing cash back to capital markets have higher future stock returns, while firms raising new cash from capital markets have lower future stock returns

Scott A. Richardson and Richard G. Sloan

Working Paper (February, 2003).

Synopsis

This paper uses financial statement data to develop a parsimonious measure of the extent to which a firm is raising (distributing) capital from (to) capital market participants. The relation between the resulting measure of net external financing and future stock returns is stronger than has been documented in previous research focusing on individual categories of financing transactions. For example, the mean annual hedge portfolio return to going long in securities of the lowest financing decile and going short in securities of the highest financing decile exceeds 15%. The paper also shows that, after controlling for refinancing transactions, these results are robust across all categories of external financing transactions including issuances and repurchases of common stock, preferred stock and debt.

Lex Huberts and Russell J. Fuller

Financial Analysts Journal, (March-April, 1995), 12-28.

Synopsis

This paper shows that firms with less predictable earnings in the past tend to have inferior earnings and stock returns in the future. Predictability is measured using the absolute values of the consensus analyst forecast errors for the past three quarters. Firms with less predictable earnings are shown to miss future earnings forecasts by greater amounts and have lower subsequent stock returns. The annual hedge portfolio return to longing firms with the most predictable earnings and shorting firms with the least predictable earnings is around 8%.

Jeffrey T. Doyle, Russell J. Lundholm and Mark T. Soliman

Working Paper (October, 2002).

Synopsis

This study shows that firms reporting 'pro forma' earnings numbers that exclude losses and expenses required under GAAP experience lower future cash flows and stock returns. The results are particularly pronounced for 'other' exclusions relating to recurring expenses rather than 'special item' exclusions relating to non-recurring charges. For example, the three year cumulative return to a hedge portfolio based on 'other exclusions' is almost 30%. However, I am concerned that the results may prove to be sample specific. They are based on a relatively small sample size and short sample period and most of the hedge portfolio returns are not realized until the third future year.