JOURNAL OF Financia侧 ECONOMICS ELSEVIER Journal of Financial Economics 54 (1999)45-73 www.elsevier.com/locate/econbase The long-run performance of stock returns following debt offerings* D.Katherine Spiess*,John Affleck-Graves Department of Finance and Business Economics.University of Notre Dame,PO Box 399.Notre Dame, N46556-0399.US4 Abstract We document substantial long-run post-issue underperformance by firms making straight and convertible debt offerings from 1975 to 1989.This long-run underperfor- mance is more severe for smaller,younger,and NASDAQ-listed firms,and for firms issuing speculative grade debt.We also find strong evidence that the underperformance of issuers of both straight and convertible debt is limited to those issues that occur in periods with a high volume of issues.In contrast to earlier event studies that found insignificantly negative abnormal returns at the time of debt issue announcements and concluded that debt offerings had no impact on shareholder wealth,our results suggest that debt offerings,like equity offerings,are signals that the firm is overvalued.As with equity offerings and repurchases,the market appears to underreact at the time of the debt offering announcement so that the full impact of the offering is only realized over a longer time horizon.C 1999 Elsevier Science S.A.All rights reserved. JEL classification:G14;G32 Keywords:Debt offerings;Underperformance Corresponding author.Tel.:+1-219-631-6268;fax:+1-219-631-5255. E-mail address:spiess.1@nd.edu (D.K.Spiess) "This paper has benefited from comments from Don Fehrs,Rick Mendenhall,Wayne Mikkelson, Megan Partch,Paula Tkac,and participants at the 1996 Western Finance Association annual meeting.In addition,we especially acknowledge suggestions by William Schwert(the Editor)and Brad Barber (the Referee). 0304-405X/99/S-see front matter 1999 Elsevier Science S.A.All rights reserved. PI:S0304-405X(99)00031-8* Corresponding author. Tel.: #1-219-631-6268; fax: #1-219-631-5255. E-mail address: spiess.1@nd.edu (D.K. Spiess) qThis paper has bene"ted from comments from Don Fehrs, Rick Mendenhall, Wayne Mikkelson, Megan Partch, Paula Tkac, and participants at the 1996 Western Finance Association annual meeting. In addition, we especially acknowledge suggestions by William Schwert (the Editor) and Brad Barber (the Referee). Journal of Financial Economics 54 (1999) 45}73 The long-run performance of stock returns following debt o!eringsq D. Katherine Spiess*, John A%eck-Graves Department of Finance and Business Economics, University of Notre Dame, PO Box 399, Notre Dame, IN 46556-0399, USA Abstract We document substantial long-run post-issue underperformance by "rms making straight and convertible debt o!erings from 1975 to 1989. This long-run underperfor￾mance is more severe for smaller, younger, and NASDAQ-listed "rms, and for "rms issuing speculative grade debt. We also "nd strong evidence that the underperformance of issuers of both straight and convertible debt is limited to those issues that occur in periods with a high volume of issues. In contrast to earlier event studies that found insigni"cantly negative abnormal returns at the time of debt issue announcements and concluded that debt o!erings had no impact on shareholder wealth, our results suggest that debt o!erings, like equity o!erings, are signals that the "rm is overvalued. As with equity o!erings and repurchases, the market appears to underreact at the time of the debt o!ering announcement so that the full impact of the o!ering is only realized over a longer time horizon. ( 1999 Elsevier Science S.A. All rights reserved. JEL classixcation: G14; G32 Keywords: Debt o!erings; Underperformance 0304-405X/99/$ - see front matter ( 1999 Elsevier Science S.A. All rights reserved. PII: S 0 3 0 4 - 4 0 5 X ( 9 9 ) 0 0 0 3 1 - 8