Why Follow-Ons Are a Red Flag

News of a follow-on equity offering is almost never received well by shareholders, and stocks typically fall on the day of the announcement. But studies also show that the negative effects of a secondary offering can actually last for years.

Companies issuing additional shares have historically underperformed nonissuing companies by 3.4% in the five years following the offering, according to Jay Ritter, professor of finance at the University of Florida.

That's potentially bad news for Activision(ATVI Quote) -- which sold new shares Wednesday -- and for the 267 other U.S. companies that have conducted follow-on offerings so far this year. ...