Mispricing of Corporate Actions: A Statistical Arbitrage Approach

This paper examines the impact of seasoned equity issues and repurchases on short-term stock performance in the U.S. and Canada. Long-term performance has been abundantly discussed in the literature, although consensus is lacking. Performing an event-studies approach (Ibbotson’s RATS methodology as well as a conventional asset pricing approach) reveals a static, statistically significant pattern in post-event returns for both issues and repurchases. These are supported by the Cumulative Abnormal Return estimates, which are significant across the board and of a level between 2 and 6 percent. The Calendar Time approach as suggested in Fama, 1998 also finds significantly positive abnormal returns. These results suggest a strong market inefficiency post corporate actions events. Applying this insight to a set of generalized trading rules for market-hedged short-term trades yields profitable results for almost all strategies. Issue strategies are more profitable than repurchase strategies and most strategies show low short-term risk metrics. None of the strategies pass the statistical arbitrage test devised in Hogan, Jarrow, Teo, and Warachka (2004).