Hertzel and Rees provide a rational explanation for a positive stock market reaction to the announcements of private sales of common equity by publicly traded firms. While previous research by Wruck (1989) and Hertzel and Smith (1993) focused on studying returns to equity holders, Hertzel and Rees focus on examining why the stock returns around the announcements are significantly positive. The authors examine two potential explanations: a change in risk and a change in future earnings. Their empirical findings are consistent with a change in earnings explanation but not with a change in risk explanation.
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