Can the Stock Market anticipate Future Operating Performance? Evidence from Equity Rights Issues

This paper examines whether the stock market valuation impact of rights issues is consistent with subsequent operating performance of issuing firms. Analysing a sample of rights issues in the Netherlands, we find that a significant stock price decline takes place with the announcement of rights issues. We then analyse post-rights issue operating performance and find that, consistent with the decline in stock price during the announcement period, issuing firms also exhibit a significant decline in their operating performance. Our analysis thus demonstrates that the stock market can successfully anticipate future changes in operating performance of firms.