INVESTMENT OPPORTUNITIES AND THE MARKET REACTION TO EQUITY OFFERINGS

This paper examines the relation between the market reaction to primar y seasoned equity offerings and alternative measures of the profitabil ity of the issuing firm's growth opportunities. While the sample offer ings display a positive relation between announcement period predictio n errors and several ex ante measures of growth opportunities, this re lation is not monotonic and appears to be driven by a small subset of younger, higher growth firms, whose announcement effects are insignifi cantly different from zero. For the remainder of the sample firms, the re is no relation between the estimated profitability of new investmen t and the market reaction to announced equity offerings. Moreover, ann ouncement effects are nonpositive regardless of how profitable investm ent opportunities are expected to be. These findings collectively sugg est that investment opportunities play, at best, a minor role in expla ining the cross-sectional distribution of equity offering announcement effects.