Investor Base, Cost of Capital, and Firm Performance: The Case of Post-Issuance Anomalies

In this study, Associate Professor Roger Edelen and co-authors Ozgur Ince and Gregory B. Kadlec from Virginia Tech examine the link between a firm’s investor base, discount rate, capital budgeting decisions, and profitability, arguing that a downward shift in discount rates associated with an expanded investor base can account for both poor stock returns and operating performance following security offerings.

The most striking finding in this study is that an expansion in the firm’s investor base is both a necessary and sufficient condition for anomalous poor performance. That is, issuing firms that do not experience a change in investor base do not exhibit anomalous post issuance performance while non-issuing firms matched on changes in investor base exhibit identical performance to that of issuing firms. More generally, the evidence suggests that the investor base plays an important role in corporate finance.