《金融投资学》教学资源（英文文献）The long-run performance of stock returns following debt offerings.pdf_大学文库

46 D.K.Spiess,J.Affleck-Graves Journal of Financial Economics 54 (1999)45-73 1.Introduction Several studies document significant long-run abnormal returns following stock issues and stock repurchases.Ritter (1991)and Loughran(1993)find that firms making initial public offerings significantly underperform non-issuing firms for up to five years after going public.Loughran and Ritter(1995)and Spiess and Affleck-Graves(1995)find similar underperformance in the five years following seasoned equity offerings.This underperformance exceeds 30%over a five-year period for both initial public offerings and seasoned equity offerings. Ikenberry et al.(1995)report significant positive abnormal returns of 12%in the four-year period following stock repurchases. An important aspect of these studies is that the long-term drift in stock returns is in the same direction as the initial reaction of the stock price at the time of the announcement,which suggests that the market,on average,under- reacts at the time of an announcement.Daniel et al.(1998)present a theoretical model based on well-known psychological biases that is consistent with inves- tors'underreaction to information events.Barberis et al.(1998)and Odean (1998)also present theoretical models of investor under-or overreaction to information.As a result,prior studies that focus on returns at the time of the announcement may be inadequate,and it may be necessary to examine perfor- mance over an extended period following an event to determine the full impact of that event. In this study,we examine the long-term performance of stocks following both straight and convertible debt offerings and find that prior studies of announce- ment period returns tell an incomplete story.Earlier studies such as Dann and Mikkelson (1984),Eckbo (1986),and Mikkelson and Partch (1986)find an insignificantly negative reaction to the announcement of straight debt offerings and conclude that straight debt issuance,on average,has no impact on share- holder wealth.Unlike the announcement period literature,we conclude that firms that are overvalued are likely to issue securities of any type,and that debt offerings,like equity offerings,are a signal that the firm is overvalued.Using a carefully constructed sample of 392 straight debt issuers over the period from 1975 to 1989,we find that the median sample firm underperforms a matched firm of similar size and book-to-market ratio by almost 19%in the five years following the debt offering. Firms issuing convertible debt also exhibit significant stock price underper- formance,and the magnitude of the response is quite similar to previously documented underperformance of equity issuers.In our sample of 400 convert- ible debt issuers,the median firm underperforms its matched counterpart by almost 20%in the five years following the convertible debt offering,while the mean holding-period return for sample firms is 37%less than the mean for the matched control firms.Dann and Mikkelson (1984)find a significant negative reaction at the announcement of convertible debt offerings.Our results confirm

1. Introduction Several studies document signi"cant long-run abnormal returns following stock issues and stock repurchases. Ritter (1991) and Loughran (1993) "nd that "rms making initial public o!erings signi"cantly underperform non-issuing "rms for up to "ve years after going public. Loughran and Ritter (1995) and Spiess and A%eck-Graves (1995) "nd similar underperformance in the "ve years following seasoned equity o!erings. This underperformance exceeds 30% over a "ve-year period for both initial public o!erings and seasoned equity o!erings. Ikenberry et al. (1995) report signi"cant positive abnormal returns of 12% in the four-year period following stock repurchases. An important aspect of these studies is that the long-term drift in stock returns is in the same direction as the initial reaction of the stock price at the time of the announcement, which suggests that the market, on average, underreacts at the time of an announcement. Daniel et al. (1998) present a theoretical model based on well-known psychological biases that is consistent with investors' underreaction to information events. Barberis et al. (1998) and Odean (1998) also present theoretical models of investor under- or overreaction to information. As a result, prior studies that focus on returns at the time of the announcement may be inadequate, and it may be necessary to examine performance over an extended period following an event to determine the full impact of that event. In this study, we examine the long-term performance of stocks following both straight and convertible debt o!erings and "nd that prior studies of announcement period returns tell an incomplete story. Earlier studies such as Dann and Mikkelson (1984), Eckbo (1986), and Mikkelson and Partch (1986) "nd an insigni"cantly negative reaction to the announcement of straight debt o!erings and conclude that straight debt issuance, on average, has no impact on shareholder wealth. Unlike the announcement period literature, we conclude that "rms that are overvalued are likely to issue securities of any type, and that debt o!erings, like equity o!erings, are a signal that the "rm is overvalued. Using a carefully constructed sample of 392 straight debt issuers over the period from 1975 to 1989, we "nd that the median sample "rm underperforms a matched "rm of similar size and book-to-market ratio by almost 19% in the "ve years following the debt o!ering. Firms issuing convertible debt also exhibit signi"cant stock price underperformance, and the magnitude of the response is quite similar to previously documented underperformance of equity issuers. In our sample of 400 convertible debt issuers, the median "rm underperforms its matched counterpart by almost 20% in the "ve years following the convertible debt o!ering, while the mean holding-period return for sample "rms is 37% less than the mean for the matched control "rms. Dann and Mikkelson (1984) "nd a signi"cant negative reaction at the announcement of convertible debt o!erings. Our results con"rm 46 D.K. Spiess, J. A{eck-Graves / Journal of Financial Economics 54 (1999) 45}73

D.K.Spiess,J.Affleck-Graves Journal of Financial Economics 54 (1999)45-73 47 that convertible debt offerings convey negative information to the market,but they suggest that the market underreacts at the time of the announcement.The similarity of the post-offering stock price response of convertible debt issuers to that of seasoned equity issuers supports the conclusion by Stein(1992)that convertible debt is used as a backdoor'equity substitute. Similar to previously documented evidence for equity offerings,we find that the post-issue underperformance of straight debt issuers is concentrated among smaller,younger,and NASDAQ-listed firms.For the largest straight debt issuers in our sample there is no underperformance.In addition,we find strong evidence that underperformance for both straight and convertible firms is limited to issues that occur in periods with a high volume of issues.This is consistent with Loughran and Ritter's(1998)claim that firm misvaluations that drive managerial choice events (e.g.,equity issues)are likely to be correlated among firms with similar characteristics,particularly smaller firms,and to display time-and industry-clustering. While our results suggest significant underreaction to the announcement of both straight and convertible debt offerings,an alternative explanation is that debt-issuing firms are systematically less risky than their nonissuing counter- parts.We attempt to control for risk differences by matching firms on the basis of size and book-to-market ratio.It is possible,however,that size and book-to- market ratio do not adequately capture the risk differences between issuers and matched non-issuers.Fama(1998)raises the issue of a bad model problem in his criticism of long-run event studies;he argues that the magnitude of abnormal returns in these studies is generally not robust to alternative specifications of expected returns or alternative subsets of the data. We address Fama's critique in two ways.First,we measure long-run perfor- mance using averages of short-run abnormal returns rather than long-run buy-and-hold returns.We do this in two ways-the 'rolling portfolio'approach recommended by Fama (1998)and the three-factor regression approach of Fama and French (1993).Using equally weighted portfolios,both of these methods yield results consistent with our buy-and-hold evidence of significant underperformance following both straight and convertible debt offerings.Sec- ond,in the context of buy-and-hold returns,we examine two alternative bench- marks of expected returns-individual matched firms chosen on the basis of industry and firm size,and the reference portfolio approach suggested by Lyon et al.(1998).Again,we find evidence of significant underperformance following both straight and convertible debt offerings.Thus,while we are ultimately unable to disentangle these two non-competing explanations-market underreaction versus a bad model problem-we do present strong evidence that our results are robust across a number of reasonable specifications and methodologies. A few other recent studies also report long-run performance following debt offerings.Cheng (1995)and Jung et al.(1995)find positive,but statistically insignificant,average long-run returns.Jewell and Livingston (1997)likewise

that convertible debt o!erings convey negative information to the market, but they suggest that the market underreacts at the time of the announcement. The similarity of the post-o!ering stock price response of convertible debt issuers to that of seasoned equity issuers supports the conclusion by Stein (1992) that convertible debt is used as a &backdoor' equity substitute. Similar to previously documented evidence for equity o!erings, we "nd that the post-issue underperformance of straight debt issuers is concentrated among smaller, younger, and NASDAQ-listed "rms. For the largest straight debt issuers in our sample there is no underperformance. In addition, we "nd strong evidence that underperformance for both straight and convertible "rms is limited to issues that occur in periods with a high volume of issues. This is consistent with Loughran and Ritter's (1998) claim that "rm misvaluations that drive managerial choice events (e.g., equity issues) are likely to be correlated among "rms with similar characteristics, particularly smaller "rms, and to display time- and industry-clustering. While our results suggest signi"cant underreaction to the announcement of both straight and convertible debt o!erings, an alternative explanation is that debt-issuing "rms are systematically less risky than their nonissuing counterparts. We attempt to control for risk di!erences by matching "rms on the basis of size and book-to-market ratio. It is possible, however, that size and book-tomarket ratio do not adequately capture the risk di!erences between issuers and matched non-issuers. Fama (1998) raises the issue of a bad model problem in his criticism of long-run event studies; he argues that the magnitude of abnormal returns in these studies is generally not robust to alternative speci"cations of expected returns or alternative subsets of the data. We address Fama's critique in two ways. First, we measure long-run performance using averages of short-run abnormal returns rather than long-run buy-and-hold returns. We do this in two ways } the &rolling portfolio' approach recommended by Fama (1998) and the three-factor regression approach of Fama and French (1993). Using equally weighted portfolios, both of these methods yield results consistent with our buy-and-hold evidence of signi"cant underperformance following both straight and convertible debt o!erings. Second, in the context of buy-and-hold returns, we examine two alternative benchmarks of expected returns } individual matched "rms chosen on the basis of industry and "rm size, and the reference portfolio approach suggested by Lyon et al. (1998). Again, we "nd evidence of signi"cant underperformance following both straight and convertible debt o!erings. Thus, while we are ultimately unable to disentangle these two non-competing explanations } market underreaction versus a bad model problem } we do present strong evidence that our results are robust across a number of reasonable speci"cations and methodologies. A few other recent studies also report long-run performance following debt o!erings. Cheng (1995) and Jung et al. (1995) "nd positive, but statistically insigni"cant, average long-run returns. Jewell and Livingston (1997) likewise D.K. Spiess, J. A{eck-Graves / Journal of Financial Economics 54 (1999) 45}73 47

48 D.K.Spiess,J.Affleck-Graves Journal of Financial Economics 54 (1999)45-73 find no evidence of underperformance in the three years following straight debt offerings for most classes of debt issues (the exception being 68 B-rated issues which have significant underperformance).All three of these studies,however, use some form of cumulative abnormal return metric,and Lyon et al.(1998) show that such metrics can lead to biased test statistics.Lee and Loughran (1998)examine only convertible debt offerings and find long-term underperfor- mance similar to that documented for our convertible debt sample.Finally, Dichev and Piotroski(1997)document significant underperformance in the five years following both straight and convertible debt offerings.Their study differs from ours,however,in three important aspects.First,they include both public and private debt offerings in their sample,but are unable to separate the performance of the two groups.Second,they provide evidence of underperfor- mance only for the quintile of firms with the largest debt offerings(relative to assets),and not for all debt offerings.Third,because of their inclusion of private debt,they are unable to ascertain the exact date of the offering.Despite these differences,the Dichev and Piotroski study provides an important complement to our results.Our results show underperformance following public debt offer- ings.Because their sample is dominated by the much larger number of private debt placements relative to public offerings,it suggests a similar conclusion following large private debt placements. 2.Data and research methods 2.1.Sample construction The sample consists of straight and convertible debt offerings during the period from 1975 to 1989,as reported in Investment Dealers'Digest Directory of Corporate Financing.To be included,issues must meet the following criteria:(1) the company is listed on the Center for Research in Securities Prices(CRSP) daily tape at the time of the issue;(2)the company is not a regulated utility or a financial institution;(3)shares traded for the company are ordinary common shares(we omit ADRs,SBIs,REITs,and closed-end funds);(4)the issue does not include warrants;(5)the issue does not include unusual securitization (e.g.,no equipment trusts and mortgage-backed securities);and (6)the company has a non-negative book-to-market ratio available on COMPUSTAT for the fiscal year-end prior to the debt offering.Applying these criteria results in a sample of 2229 offerings,1557 straight debt offerings and 672 convertible debt offerings.There are 1061 different firms represented in the combined sample;641 of these make only one debt issue during the sample period,192 firms make two issues,90 firms make three issues,41 firms make four issues,29 firms make five issues,and 68 firms make more than five issues (ranging from six to 24). Because test statistics are based on the assumption that the observations are

"nd no evidence of underperformance in the three years following straight debt o!erings for most classes of debt issues (the exception being 68 B-rated issues which have signi"cant underperformance). All three of these studies, however, use some form of cumulative abnormal return metric, and Lyon et al. (1998) show that such metrics can lead to biased test statistics. Lee and Loughran (1998) examine only convertible debt o!erings and "nd long-term underperformance similar to that documented for our convertible debt sample. Finally, Dichev and Piotroski (1997) document signi"cant underperformance in the "ve years following both straight and convertible debt o!erings. Their study di!ers from ours, however, in three important aspects. First, they include both public and private debt o!erings in their sample, but are unable to separate the performance of the two groups. Second, they provide evidence of underperformance only for the quintile of "rms with the largest debt o!erings (relative to assets), and not for all debt o!erings. Third, because of their inclusion of private debt, they are unable to ascertain the exact date of the o!ering. Despite these di!erences, the Dichev and Piotroski study provides an important complement to our results. Our results show underperformance following public debt o!erings. Because their sample is dominated by the much larger number of private debt placements relative to public o!erings, it suggests a similar conclusion following large private debt placements. 2. Data and research methods 2.1. Sample construction The sample consists of straight and convertible debt o!erings during the period from 1975 to 1989, as reported in Investment Dealers+ Digest Directory of Corporate Financing. To be included, issues must meet the following criteria: (1) the company is listed on the Center for Research in Securities Prices (CRSP) daily tape at the time of the issue; (2) the company is not a regulated utility or a "nancial institution; (3) shares traded for the company are ordinary common shares (we omit ADRs, SBIs, REITs, and closed-end funds); (4) the issue does not include warrants; (5) the issue does not include unusual securitization (e.g., no equipment trusts and mortgage-backed securities); and (6) the company has a non-negative book-to-market ratio available on COMPUSTAT for the "scal year-end prior to the debt o!ering. Applying these criteria results in a sample of 2229 o!erings, 1557 straight debt o!erings and 672 convertible debt o!erings. There are 1061 di!erent "rms represented in the combined sample; 641 of these make only one debt issue during the sample period, 192 "rms make two issues, 90 "rms make three issues, 41 "rms make four issues, 29 "rms make "ve issues, and 68 "rms make more than "ve issues (ranging from six to 24). Because test statistics are based on the assumption that the observations are 48 D.K. Spiess, J. A{eck-Graves / Journal of Financial Economics 54 (1999) 45}73

D.K.Spiess,J.Affleck-Graves Journal of Financial Economics 54 (1999)45-73 49 independent,we restrict our analysis to the subset of observations for which there is no overlap of the five-year post-offering windows for repeat issues.Using all observations and ignoring the statistical problems caused by overlapping returns,however,yields qualitatively identical results.The resulting sample consists of 792 independent issues,392 straight debt offerings and 400 convert- ible debt offerings. In Table 1 we present the distribution by year for our full sample of debt offerings and for the restricted sample of independent offerings.The number of offerings fluctuates from year to year and is similar to the pattern of equity offerings that Spiess and Affleck-Graves(1995)and Loughran and Ritter (1995)find during this time period.As with equity offerings,there were more issues during the 1980s than during the last half of the 1970s,especially during 1986. Table 1 Distribution of debt offerings by year The sample includes all debt offerings reported in Investment Dealers'Digest Directory of Corporate Financing over the period 1975-1989 that meet the following criteria:(1)The company is listed on the CRSP daily NYSE,Amex and NASDAQ tape at the time of the issue;(2)the company is not a regulated utility or a financial institution;(3)the shares traded for the company are ordinary common shares (ADRs,SBIs,REITs,and closed-end funds are omitted;(4)the issue does not include warrants;and(5)the issue does not include unusual securitization(e.g,equipment trusts and mortgage-backed securities are omitted).Independent offerings are those for which the firm has not made any other debt issues during the five years following the sample offering Year Total number Straight debt Convertible debt of offerings All Independent All Independent offerings offerings offerings offerings 1975 112 100 60 12 9 1976 71 57 23 14 1977 60 50 24 10 4 1978 1979 83 64 516 14 12 1980 91 1981 111 60 11 1961 24 1982 145 100 24 1983 152 90 2 29 1984 125 94 12 1985 241 165 32 1 4 1986 377 248 1987 239 145 92 129 91 1988 140 120 25 20 13 1989 158 119 1 3 Total 2229 1557 392 672 400

Table 1 Distribution of debt o!erings by year The sample includes all debt o!erings reported in Investment Dealers+ Digest Directory of Corporate Financing over the period 1975}1989 that meet the following criteria: (1) The company is listed on the CRSP daily NYSE, Amex and NASDAQ tape at the time of the issue; (2) the company is not a regulated utility or a "nancial institution; (3) the shares traded for the company are ordinary common shares (ADRs, SBIs, REITs, and closed-end funds are omitted); (4) the issue does not include warrants; and (5) the issue does not include unusual securitization (e.g., equipment trusts and mortgage-backed securities are omitted). Independent o!erings are those for which the "rm has not made any other debt issues during the "ve years following the sample o!ering Year Total number Straight debt Convertible debt of o!erings All o!erings Independent o!erings All o!erings Independent o!erings 1975 112 100 60 12 9 1976 71 57 23 14 8 1977 60 50 24 10 4 1978 78 64 25 14 8 1979 73 54 16 19 12 1980 147 91 34 56 32 1981 111 60 11 51 24 1982 145 100 11 45 24 1983 152 90 24 62 29 1984 125 94 15 31 12 1985 241 165 32 76 44 1986 377 248 49 129 91 1987 239 145 25 94 64 1988 140 120 25 20 13 1989 158 119 18 39 26 Total 2229 1557 392 672 400 independent, we restrict our analysis to the subset of observations for which there is no overlap of the "ve-year post-o!ering windows for repeat issues. Using all observations and ignoring the statistical problems caused by overlapping returns, however, yields qualitatively identical results. The resulting sample consists of 792 independent issues, 392 straight debt o!erings and 400 convertible debt o!erings. In Table 1 we present the distribution by year for our full sample of debt o!erings and for the restricted sample of independent o!erings. The number of o!erings #uctuates from year to year and is similar to the pattern of equity o!erings that Spiess and A%eck-Graves (1995) and Loughran and Ritter (1995) "nd during this time period. As with equity o!erings, there were more issues during the 1980s than during the last half of the 1970s, especially during 1986. D.K. Spiess, J. A{eck-Graves / Journal of Financial Economics 54 (1999) 45}73 49

50 D.K.Spiess,J.Affleck-Graves Journal of Financial Economics 54 (1999)45-73 2.2.Matched firm selection Our primary benchmark of aftermarket performance is a size-and-book-to- market-matched sample of non-issuing firms.These control firms are also matched by trading system(NYSE/Amex or NASDAQ)and comprise firms that have not publicly sold new shares of equity or made a public debt offering during the five years prior to the debt offering by the corresponding sample firm. Barber and Lyon(1997)provide a complete discussion of the statistical issues involved in tests of long-run returns and conclude that the matched control firm approach leads to unbiased test statistics. The procedure we use to choose the control firms is similar to that used by Spiess and Affleck-Graves (1995).At each year end,all NYSE/Amex common stocks listed on the CRSP tape that have not publicly sold new equity or new debt during the previous five years(or since the time of listing if they have been listed for less than five years)are ranked by their market capitalization and their book-to-market ratio.For each NYSE/Amex-listed firm in the sample,we select the first matched firm from the set of potential matches such that the sum of the absolute percentage difference between the sizes(at December 31 of the year preceding the issue)and book-to-market ratios(at the end of the fiscal year prior to the issue)of the issuing firm and the matched firm is minimized.We constrain the pool of potential matches so that matched firms are not more than ten percent smaller than their sample firms.1 If the first matched firm is delisted or publicly sells new debt during the holding period,we substitute the next closest matched firm at the close of trading on the date of the delisting or security sale. For the independent sample,170 issues required two matched firms,31 required three,six required four,and two required five.Matched firms are not allowed to be used more than once on the same trading day. We use a similar procedure to choose matched firms for the NASDAQ subset of the sample,except that the potential matches come from the set of NASDAQ-listed firms on the CRSP tape that have not publicly sold debt or equity during the prior five years (or since the date of their listing if that is less than five years).For NASDAQ debt offerings in 1975-1977,all firms that were trading on December 14,1972(the first CRSP NASDAQ trading date)are considered as potential matches. Table 2 presents summary statistics for the sample and the set of first matched firms.The mean straight debt issue of $93.1 million is almost twice as large as the mean convertible debt issue of $47.7 million.Both of these values are larger than the mean issue size of $36.6 million reported by Spiess and Affleck-Graves(1995) for primary seasoned equity offerings during the same time period.In addition, 1 Eleven firms did not have any potential matches meeting this constraint and so were matched with the closest fit available.The impact of the precision of the matches is discussed in Section 5

1Eleven "rms did not have any potential matches meeting this constraint and so were matched with the closest "t available. The impact of the precision of the matches is discussed in Section 5. 2.2. Matched xrm selection Our primary benchmark of aftermarket performance is a size-and-book-tomarket-matched sample of non-issuing "rms. These control "rms are also matched by trading system (NYSE/Amex or NASDAQ) and comprise "rms that have not publicly sold new shares of equity or made a public debt o!ering during the "ve years prior to the debt o!ering by the corresponding sample "rm. Barber and Lyon (1997) provide a complete discussion of the statistical issues involved in tests of long-run returns and conclude that the matched control "rm approach leads to unbiased test statistics. The procedure we use to choose the control "rms is similar to that used by Spiess and A%eck-Graves (1995). At each year end, all NYSE/Amex common stocks listed on the CRSP tape that have not publicly sold new equity or new debt during the previous "ve years (or since the time of listing if they have been listed for less than "ve years) are ranked by their market capitalization and their book-to-market ratio. For each NYSE/Amex-listed "rm in the sample, we select the "rst matched "rm from the set of potential matches such that the sum of the absolute percentage di!erence between the sizes (at December 31 of the year preceding the issue) and book-to-market ratios (at the end of the "scal year prior to the issue) of the issuing "rm and the matched "rm is minimized. We constrain the pool of potential matches so that matched "rms are not more than ten percent smaller than their sample "rms.1 If the "rst matched "rm is delisted or publicly sells new debt during the holding period, we substitute the next closest matched "rm at the close of trading on the date of the delisting or security sale. For the independent sample, 170 issues required two matched "rms, 31 required three, six required four, and two required "ve. Matched "rms are not allowed to be used more than once on the same trading day. We use a similar procedure to choose matched "rms for the NASDAQ subset of the sample, except that the potential matches come from the set of NASDAQ-listed "rms on the CRSP tape that have not publicly sold debt or equity during the prior "ve years (or since the date of their listing if that is less than "ve years). For NASDAQ debt o!erings in 1975}1977, all "rms that were trading on December 14, 1972 (the "rst CRSP NASDAQ trading date) are considered as potential matches. Table 2 presents summary statistics for the sample and the set of "rst matched "rms. The mean straight debt issue of $93.1 million is almost twice as large as the mean convertible debt issue of $47.7 million. Both of these values are larger than the mean issue size of $36.6 million reported by Spiess and A%eck-Graves (1995) for primary seasoned equity o!erings during the same time period. In addition, 50 D.K. Spiess, J. A{eck-Graves / Journal of Financial Economics 54 (1999) 45}73

D.K.Spiess,J.Affleck-Graves Journal of Financial Economics 54 (1999)45-73 51 firms making straight debt offerings are,on average,more than four times as large as those making convertible offerings.The mean pre-issue market capital- ization is $898 million for the straight debt issuers and $211 million for the convertible issuers;the comparable size of seasoned equity issuers is $332 million.The book-to-market ratio of the straight debt firms is higher than that of the convertible debt firms,and,while both offer types follow periods of strong stock market performance,the convertible issues follow periods of especially strong performance.Specifically,the mean pre-offer abnormal buy-and-hold return for the five-year period preceding the offer date is 74%for the straight debt sample and 187%for the convertible debt sample. Table 2 also provides evidence regarding the similarity of the sample and matched firms with respect to several characteristics.The mean difference in market capitalization between the straight debt sample firms and their matched firms is not statistically different from zero.The mean difference in book-to- market ratios for the two sets is also not statistically different from zero.While not reported in this table,69%of the straight debt firms have matched firm sizes within 5%of their corresponding sample firm sizes,and 92%have size matches within 10%.Sixty percent of the sample firms have book-to-market matches within 5%and 78%have book-to-market matches within 10%.Thus,we appear to have achieved fairly precise matches for our straight debt issuers with respect to both size and book-to-market ratio.In addition,the matched firms do not differ significantly from the straight debt sample firms with respect to five-year pre-offer abnormal returns,six-month pre-offer abnormal returns,or firm age. The matched firms are not as similar to their sample firms for the convertible debt issuers.The matched firms are,on average,larger than their corresponding sample firms.Given the negative relation between firm size and expected return, however,this should bias against finding abnormal underperformance on the part of our convertible debt issuers.The matched firms are also older than the sample firms,and they have higher book-to-market ratios and lower pre-offer abnormal returns (on both the five-year and the six-month horizon).While the mismatch on book-to-market ratio and pre-offer returns could bias in favor of finding abnormal underperformance of our convertible debt sample,we present evidence in Section 5 that this is not the case. 2.3.Long-run returns measure To measure the long-run performance of our debt offering firms,we compute an aftermarket return from purchasing the shares of the issuing firm at the closing price on the day of the offering.The aftermarket consists of the following 60 months,where months are defined as successive 21-trading-day periods. Several studies,particularly Conrad and Kaul (1993)and Barber and Lyon (1997),show a potential bias induced by cumulating short-term abnormal

"rms making straight debt o!erings are, on average, more than four times as large as those making convertible o!erings. The mean pre-issue market capitalization is $898 million for the straight debt issuers and $211 million for the convertible issuers; the comparable size of seasoned equity issuers is $332 million. The book-to-market ratio of the straight debt "rms is higher than that of the convertible debt "rms, and, while both o!er types follow periods of strong stock market performance, the convertible issues follow periods of especially strong performance. Speci"cally, the mean pre-o!er abnormal buy-and-hold return for the "ve-year period preceding the o!er date is 74% for the straight debt sample and 187% for the convertible debt sample. Table 2 also provides evidence regarding the similarity of the sample and matched "rms with respect to several characteristics. The mean di!erence in market capitalization between the straight debt sample "rms and their matched "rms is not statistically di!erent from zero. The mean di!erence in book-tomarket ratios for the two sets is also not statistically di!erent from zero. While not reported in this table, 69% of the straight debt "rms have matched "rm sizes within 5% of their corresponding sample "rm sizes, and 92% have size matches within 10%. Sixty percent of the sample "rms have book-to-market matches within 5% and 78% have book-to-market matches within 10%. Thus, we appear to have achieved fairly precise matches for our straight debt issuers with respect to both size and book-to-market ratio. In addition, the matched "rms do not di!er signi"cantly from the straight debt sample "rms with respect to "ve-year pre-o!er abnormal returns, six-month pre-o!er abnormal returns, or "rm age. The matched "rms are not as similar to their sample "rms for the convertible debt issuers. The matched "rms are, on average, larger than their corresponding sample "rms. Given the negative relation between "rm size and expected return, however, this should bias against "nding abnormal underperformance on the part of our convertible debt issuers. The matched "rms are also older than the sample "rms, and they have higher book-to-market ratios and lower pre-o!er abnormal returns (on both the "ve-year and the six-month horizon). While the mismatch on book-to-market ratio and pre-o!er returns could bias in favor of "nding abnormal underperformance of our convertible debt sample, we present evidence in Section 5 that this is not the case. 2.3. Long-run returns measure To measure the long-run performance of our debt o!ering "rms, we compute an aftermarket return from purchasing the shares of the issuing "rm at the closing price on the day of the o!ering. The aftermarket consists of the following 60 months, where months are de"ned as successive 21-trading-day periods. Several studies, particularly Conrad and Kaul (1993) and Barber and Lyon (1997), show a potential bias induced by cumulating short-term abnormal D.K. Spiess, J. A{eck-Graves / Journal of Financial Economics 54 (1999) 45}73 51

54 D.K.Spiess,J.Affleck-Graves Journal of Financial Economics 54 (1999)45-73 returns over long periods.While Loughran and Ritter(1996)dispute the bias found by Conrad and Kaul (1993),Barber and Lyon (1997)and Kothari and Warner(1997)present evidence that using cumulated abnormal returns over long periods does lead to biased statistical tests.Barber and Lyon (1997)also show,however,that the bias disappears if a single matched control firm is used. We therefore measure long-run post-offering performance by computing hold- ing-period returns for each debt-issuing firm and its matched control firm over a five-year period following the debt offering date.If the offering firm is delisted before the five-year anniversary of its debt sale,the holding-period returns of that firm and its matched firm are truncated on the same day. In Section 4,we demonstrate the robustness of our results using several alternative methods.There,we report results of long-run performance based on average monthly abnormal returns rather than buy-and-hold returns,based on three-factor regressions of calendar-time abnormal returns,and using alterna- tive benchmarks of buy-and-hold returns. 3.Post-offering performance Table 3 reports the distributions of post-offering holding-period returns for sample firms,matched firms,and the paired differences.We also provide statistical results for differences in the mean and in the median holding-period return.Because we are interested in the abnormal returns associated with a debt offering by the typical firm,we focus throughout the remainder of the paper on medians but we do report means when they lead to important differences in the conclusions drawn. 3.1.Post-offering performance of straight debt issuers For the straight debt issuers,the median five-year holding-period return is 43.8%,while the median holding-period return for their size-and-book-to- market-matched counterparts is 65.8%.The median difference in holding- period returns is -18.7%and is significant at the 0.01 level using the Wilcoxon signed-ranks test.In addition,the difference between the holding-period return of the sample and the matched firms is negative in 56%of the cases,and this fraction is statistically different from 50%using a simple sign test.The mean holding-period return of 83.1%is not,however,statistically different from the 97.4%mean return for the matched firms.Our median results suggest that,for the individual firm,issuing debt is likely to be followed by a period of relative underperformance.The mean result indicates that it may be difficult for inves- tors to earn abnormal profits by trading on this underperformance. Prior studies such as Dann and Mikkelson(1984),Eckbo (1986),and Mikkel- son and Partch (1986)find an insignificantly negative price reaction to the

returns over long periods. While Loughran and Ritter (1996) dispute the bias found by Conrad and Kaul (1993), Barber and Lyon (1997) and Kothari and Warner (1997) present evidence that using cumulated abnormal returns over long periods does lead to biased statistical tests. Barber and Lyon (1997) also show, however, that the bias disappears if a single matched control "rm is used. We therefore measure long-run post-o!ering performance by computing holding-period returns for each debt-issuing "rm and its matched control "rm over a "ve-year period following the debt o!ering date. If the o!ering "rm is delisted before the "ve-year anniversary of its debt sale, the holding-period returns of that "rm and its matched "rm are truncated on the same day. In Section 4, we demonstrate the robustness of our results using several alternative methods. There, we report results of long-run performance based on average monthly abnormal returns rather than buy-and-hold returns, based on three-factor regressions of calendar-time abnormal returns, and using alternative benchmarks of buy-and-hold returns. 3. Post-o4ering performance Table 3 reports the distributions of post-o!ering holding-period returns for sample "rms, matched "rms, and the paired di!erences. We also provide statistical results for di!erences in the mean and in the median holding-period return. Because we are interested in the abnormal returns associated with a debt o!ering by the typical "rm, we focus throughout the remainder of the paper on medians but we do report means when they lead to important di!erences in the conclusions drawn. 3.1. Post-owering performance of straight debt issuers For the straight debt issuers, the median "ve-year holding-period return is 43.8%, while the median holding-period return for their size-and-book-tomarket-matched counterparts is 65.8%. The median di!erence in holdingperiod returns is !18.7% and is signi"cant at the 0.01 level using the Wilcoxon signed-ranks test. In addition, the di!erence between the holding-period return of the sample and the matched "rms is negative in 56% of the cases, and this fraction is statistically di!erent from 50% using a simple sign test. The mean holding-period return of 83.1% is not, however, statistically di!erent from the 97.4% mean return for the matched "rms. Our median results suggest that, for the individual "rm, issuing debt is likely to be followed by a period of relative underperformance. The mean result indicates that it may be di$cult for investors to earn abnormal pro"ts by trading on this underperformance. Prior studies such as Dann and Mikkelson (1984), Eckbo (1986), and Mikkelson and Partch (1986) "nd an insigni"cantly negative price reaction to the 54 D.K. Spiess, J. A{eck-Graves / Journal of Financial Economics 54 (1999) 45}73