Stock returns and earnings persistence following equity financing and earnings announcement: Considering managerial characteristics

Abstract

This study examines whether future stock returns and earnings persistence decline when a firm has issued equity within 1 month of its earnings announcement (post‐EA equity financing), considering managerial ability and overconfidence. The results show that when overconfident managers engage in post‐EA equity financing, buy‐and‐hold returns significantly decrease in the subsequent month and earnings persistence is low within the subsequent year. However, firms with overconfident, high‐ability managers do not experience lower returns following post‐EA equity financing and have larger earnings variability within the subsequent 3 years. The decline in returns in the month during post‐EA equity financing is more pronounced for firms with high financial constraints or low financial flexibility with overconfident managers. Overall, our results highlight the managerial traits of firms that engage in equity issuance after information release.