Equity Performance after Follow-On Offerings: A Modern Reexamination with Portfolio Applications

Follow-on equity issuance is a critical function of capital markets for raising post-IPO capital for firms, but previous research has extensively debated whether issuers’ stocks underperform after offerings. With the recent dominance of alternative offering structures in equity capital markets, the author revisits firm and stock performance after follow-on offerings, as well as examines portfolio strategies that apply the findings. The author finds that average stock performance is significantly positive in the period leading up to most offering types and becomes negative afterward, with excess return and alpha differences up to 45% over 18 months. Portfolios constructed to screen follow-on offering issuers, use an inverse basket, or enhance momentum strategies have generated positive excess returns over standard strategies that do not use follow-on offering information.