Discussing “Idiosyncratic risk and long- run stock performance following seasoned equity offerings” Authors: Po-Hsin Ho, Chia-Wei Huang, Chih-Yung Lin, and Ju-Fang Yen By: Yao-Min Chiang National Chengchi University December 7, 2012 At 2012 NTU International Conference on Finance 1

Summary It is important to explore potential explanations for the long-run underperformance of SEOs. Rational learning about long-term mean profitability provides an alternative explanation for the long-run stock underperformance after a SEO. Pastor and Veronesi’s (2003) rational learning model shows that a firm facing higher uncertainty about mean profitability resolves its uncertainty more quickly and therefore experiences a larger reduction in its idiosyncratic return volatility over time. The long-run stock underperformance of SEOs can be ascribed to the abnormal decline in idiosyncratic return volatility over time due to learning. 2

Systematic risk vs. idiosyncratic risk Carlson, A. Fisher, and R. Giammarino. 2010, SEO risk dynamics. Review of Financial. Studies, 23(11):4026–4077. “In a behavioral theory, systematic mispricing can cause increasing pre-issuance and decreasing post-issuance risk but idiosyncratic mispricing cannot.” “We conclude that when SEO issuance is driven by overvaluation related to an increase in systematic sentiment, the SEO firm beta is likely to decline after issuance. By contrast, SEOs driven by idiosyncratic overvaluation will not produce this effect in the post- issuance beta.” Implication on the paper: – This paper can not cull out the possibility that long run underperformance is due to decrease in beta. – This paper is able to show that long run underperformance is due to decrease in idiosyncratic risk. 3

Learning effect “We find that the post-issue long-run underperformance is larger for young SEO firms than for mature SEO firms, indicating that young firms accompanied by strong learning effect play an important role in the long-run underperformance of SEOs.” Young firms == learning effect ? So, – Decreasing idiosyncratic risk is a common trend for firms getting older? Once matching with years listed: “Overall, the evidence in Table 9 further confirms that the post- issue stock underperformance can be explained by young firms with steeper declines in idiosyncratic volatility due to learning about future average profitability. Once we control for the number of years listed, we find no evidence of stock underperformance. “ – having long run underperformance for those SEO firms is mainly due to how long they have been listed, not because they have SEOs? 4

Young firms vs. matured firms “We find that the post-issue long-run underperformance is larger for young SEO firms than for mature SEO firms, indicating that young firms accompanied by strong learning effect play an important role in the long-run underperformance of SEOs.” “because utilities and financial firms are excluded from their sample but included in our sample.” “we find no evidence on the post-issue stock abnormal return for firms that listed for more than 10 years. ” Question: – Why including utilities and financial firms? – Utilities and financial firms tend to be matured firms. Results are driven by this selection bias? 5

Clustering: year/firm “Table 3 presents estimates of the median regression models in equation (3) The results are qualitatively the same when we use OLS.” – Why not just using OLS? 6 Econometric issues