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Understanding stock price behavior around external financing

Research output: Contribution to Journal/MagazineJournal articlepeer-review

E-pub ahead of print
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Article number102730
<mark>Journal publication date</mark>30/04/2025
<mark>Journal</mark>Journal of Corporate Finance
Volume91
Publication StatusE-pub ahead of print
Early online date26/12/24
<mark>Original language</mark>English

Abstract

The negative association between pre-financing price run-ups and post-financing price drift-downs is well documented in the literature. We find that firms experiencing pre-financing run-ups and firms experiencing post-financing long-term underperformance may not always be the same firms. The firms with high levels of cash flows experience pre-financing price run-ups but do not suffer post-financing price drift-downs. On the other hand, firms with low cash flow levels do not have pre-financing price run-ups but experience post-financing long-term underperformance even after controlling for various well-documented anomalies. Profitability analyses around external financing suggest that high-cash-flow firms' pre-financing price run-ups could be driven by their robust profitability, whereas low-cash-flow firms' post-financing underperformance might be attributable to their losses.