Prior studies have documented long-run stock market underperformance after
security offerings. Some studies conjectured that the post-issue
underperformance might be the result of pre-issue investor optimism. The study
reported here investigated (1) whether investor optimism is associated with
post-issue underperformance, (2) how investor optimism changes in the one-year
period surrounding the security-offering month, (3) whether investor optimism
differs between equity issuers and debt issuers, and (4) whether such
differences affect companies’ financing choices. We confirmed
underperformance of debt and equity issuers and found that the post-issue
buy-and-hold abnormal returns are negatively associated with pre-issue investor
optimism. We found little evidence, however, that investor optimism affects
companies’ financing choices.