This paper examines the revisions of analysts' forecasts of future earnings around announcements of common stock offerings. The forecasts of the correct year earnings are, on average, decreased when firms announce plans to issue additional common stock. The size of the decrease is significantly related to announcement period abnormal stock returns. In contrast, forecasts of the five-year growth rate of earnings are, on average, unchanged. The authors interpret these results as being consistent with the claim that equity offering announcements convey unfavorable information regarding the firm's short-term, but not its long-term, earnings prospects.

ABSTRACT This paper examines the revisions of analysts' forecasts of future earnings around announcements of common stock offerings. The forecasts of the current year earnings are, on average, decreased when firms announce plans to issue additional common stock. The size of the decrease is significantly related to announcement period abnormal stock returns. In contrast, forecasts of the five‐year growth rate of earnings are, on average, unchanged. We interpret these results as being consistent with the claim that equity offering announcements convey unfavorable information regarding the firm's short‐term but not its long‐term earnings prospects.

Prior research suggests that financial analysts’ earnings forecasts and stock prices underreact to earnings news. This paper provides evidence that analysts and investors correct this underreaction in response to the next earnings announcement and to other (non‐earnings‐surprise) information available between earnings announcements. Our evidence also suggests that analysts and investors underreact to information reflected in analysts’ earnings forecast revisions and that non‐earnings‐surprise information helps correct this underreaction as well. Controlling for corrective non‐earnings‐surprise information significantly increases estimates of the degree to which analysts’ forecasting behavior can explain drifts in returns following both earnings announcements and analysts’ earnings forecast revisions.

We examine analysts' earnings forecasts for a sample of takeover targets and document that the announcement-month forecasts are systematically revised upward, supporting the hypothesis that a takeover announcement conveys favorable information about the target firm. In addition, we find that abnormal forecast revisions of future stand-alone earnings are significantly greater for targets with low Tobin's q-ratios relative to targets with high q-ratios, lending further support to the information hypothesis. Finally, we provide evidence that managerial resistance to the takeover does not destroy value. Our results are in direct contrast to Pound (1988).

The leading explanation for the post-issue long-run stock return underperformace of seasoned equity offering firms is that investors have optimistic expectations regarding future earnings and the underperformance occures as these expectations are corrected over time. To directly test this hypothessis, we examine investors' reaction to quarterly earnings announcements over a five-year period following the offering for a large sample of seasoned equity issuing firms. In general, our evidence suggests that investorsare not disappointed by earnings announcements that follow seasoned equity offerings. This result is not sensitive to widening the windown over which earnings announcement returns are computed. This result also holds true for subsets of equity issuing firms. The choice fo these three subsets is predicated by extant evidence that these firms are likely to convey relatively more unfavorable information throung their earnings announcements. Overall, our findings are inconsistent with the optimistic expectations hypotgesis.