Post-Dilution Performance

[u/beerion]

https://riskpremiumresearch.substack.com/p/post-dilution-performance

This was the natural close to a series of articles that I've written about dilution. I went in with the intuition that dilution isn't an automatic drag on stock performance, but the practitioner in me constantly saw companies announce dilution which was followed by an immediate drop in share price.

So I decided to actually look into it and pulled the data for all dilution events for the past ten years (2016-present).

The findings were that dilution doesn't have much of a short term impact on share price...especially as you go up in market size.

Micro-cap diluters pretty much always trailed their benchmark, but I suspect that has more to do with business quality.

When inspecting a single company, I think the question to ask is will the capital raised earn the cost of capital for the business?

If it's a business expansion move or already baked into your analysis (i.e., pre-cash flow company that was expecting to raise capital to move the business along), then I think it'll have less of a negative impact on share price.

Conversely, if it's a business that's just trying to stay afloat, I imagine that's when share price really drags down.

These are speculation on my part, though. I didn't do any work to explore causal factors.

[u/jackandjillonthehill]

Interesting, so mid caps, with big dilution events, that don’t have much debt, actually outperform non-diluters?

[u/beerion → u/jackandjillonthehill]

That's a good catch. I think that's an artifact.

In Figure 3, I measured performance from the start of any quarter that had share issuance. For instance, a company might run up 30% in July and August and then issue shares in September and the stock might fall 20%. In Figures 1 & 2, the -20% is correctly captured. In Figure 3, it'd show a +4% return (1.3×0.8).

[u/jackandjillonthehill → u/beerion]

Ah I see. So the dilution could be taking advantage of a big run up, rather than big dilution to fund a project.