Equity offerings are usually characterized by large information asymmetries between issuers and investors. Using a sample of repeat equity issues, I examine whether investors form beliefs of corporate intentions based on the outcomes of past offerings by the same firm. I document a robust negative relationship between post-issue returns and underpricing in a follow-on offering. The evidence is most consistent with the idea that market feedback influences investor beliefs of a firm's investment opportunities in a subsequent offering. Feedback is particularly important when it contains information about investment opportunities that managers do not possess. The results also provide insights into the impact of market feedback on the cost of issuing further equity.

While convertible offerings announced between 1984 and 1999 induce average abnormal stock returns of −1.69%, convertible announcement effects over the period 2000–2008 are more than twice as negative (−4.59%). We hypothesize that this evolution is attributable to a shift in the convertible bond investor base from long-only investors towards convertible arbitrage funds. These funds buy convertibles and short the underlying stocks, causing downward price pressure. Consistent with this hypothesis, we find that the differences in announcement returns between the Traditional Investor period (1984–1999) and the Arbitrage period (2000–September 2008) disappear when controlling for arbitrage-induced short selling associated with a range of hedging strategies. Post-issuance stock returns are also in line with the arbitrage explanation. Average announcement effects of convertibles issued during the Global Financial Crisis are even more negative (−9.12%), due to a combination of short-selling price pressure and issuer, issue, and macroeconomic characteristics associated with these offerings.