Under New Management: Equity Issues and the Attribution of Past Returns
Malcolm Baker
Harvard Business School and NBER
mbaker@hbs.edu
Yuhai Xuan
University of Illinois at Urbana-Champaign
yhxuan@illinois.edu
Journal of Financial Economics, forthcoming
Abstract
There is a strong link between measures of stock market performance and subsequent equity issues. We find that management turnover weakens the link between equity issues and the returns that preceded the new CEO. Moreover, there is a discontinuity in the distribution of equity issues around the specific share price that the CEO inherited, while there is no discontinuity around salient share prices prior to turnover. The evidence suggests that capital allocation involves an attribution of past returns not only to the firm but also to its CEO. A corollary is that a firm with poor stock market performance may be better able to raise new capital if its current CEO is replaced.
JEL classification: G32
Keywords: Equity issues; Seasoned equity offerings; Reference point; CEO turnover
