Seasoned equity offerings and corporate financial management

We assume executives managing corporate financial policy consider the firm's current and target leverage, investment plans, anticipated cash flows, and consequences of alternative sequences of financing transactions, operating within efficient markets. Our analysis yields time-series and cross-sectional predictions for management of investment spending and leverage; use of maturity, priority, and convertibility covenants; and management of dividends, share repurchases, cash balances, and credit lines. Our evidence from 8608 SEOs covering 1970–2015 is consistent with implications of our theory, helps to resolve an array of issues in corporate finance, and offers a step toward a more unified analysis of rational corporate financial management.     

Seasoned equity offerings,market timing,and the corporate lifecycle

Both a firm's market-timing opportunities and its corporate lifecycle stage exert statistically and economically significant influences on the probability that it conducts a seasoned equity offering (SEO), with the lifecycle effect empirically stronger. Neither effect adequately explains SEO decisions because a near-majority of issuers are not growth firms and the vast majority of firms with high M/B ratios and high recent and poor future stock returns fail to issue stock. Since without the offer proceeds 62.6% of issuers would run out of cash (81.1% would have subnormal cash balances) the year after the SEO, a near-term cash need is the primary SEO motive, with market-timing opportunities and lifecycle stage exerting only ancillary influences.     

Deviations from optimal CEO ownership and firm value

The transaction cost theory of managerial ownership and firm value predicts that deviations from optimal managerial ownership reduce firm value. This paper empirically tests the transaction cost theory by studying the relation between deviations on either side of optimal CEO ownership and firm value. We find that both above-optimal and below-optimal deviations reduce firm value. We find that a change in CEO ownership is associated with a higher (lower) abnormal return if it moves the ownership towards (away from) the optimal level. These findings are consistent with the transaction cost theory of managerial ownership and firm value.     

Seasoned equity offerings and the short- and long-run performance of initial public offerings in the UK

In contrast to the US practice, rights issues is the predominant method of raising additional equity capital in the London market. the UK evidence for the period 1980-1991 provides no support to the hypothesis that IPO firms deliberately underprice to signal their quality and facilitate subsequent seasoned equity offerings. the level of initial returns is related neither to the size of the issue nor to the price response at the announcement of a rights issue. the results demonstrate, however, that firms with higher first day returns are quicker in returning to the market for additional equity capital. There is also strong evidence to suggest that the announcement of a seasoned equity offering follows a period of significant rises in the stock prices of reissuing firms. Such gains are, however, dissipated quickly in the 18 months after the announcement of the seasoned equity offering. the level of underperformance is particularly pronounced for firms that raised relatively small subsequent amounts of capital in relation to funds raised at the initial offering. Thus, the paper documents a pattern of post-issue behaviour which is fundamentally similar for both unseasoned and seasoned equity offerings.     

Seasoned equity offerings: Quality of accounting information and expected flotation costs

Flotation costs represent a significant loss of capital to firms and are positively related to information asymmetry between managers and outside investors. We measure a firm's information asymmetry by its accounting information quality based on two extensions of the Dechow and Dichev [2002. The quality of accruals and earnings: the role of accrual estimation errors. Accounting Review 77, 35–59] earnings accruals model, which is a more direct approach to assessing the information available to outside investors than the more commonly used proxies. Our main hypothesis is that poor accounting information quality raises uncertainty about a firm's financial condition for outside investors, though not necessarily for insiders. This accounting effect lowers demand for a firm's new equity, thereby raising underwriting costs and risk. Using a large sample of seasoned equity offerings (SEOs), we show that poor accounting information quality is associated with higher flotation costs in terms of larger underwriting fees, larger negative SEO announcement effects, and a higher probability of SEO withdrawals. These results are robust to joint determination of offer size and flotation cost components and to adjustments for sample selection bias.     

Market-to-book ratios,equity retention,and management ownership in Finnish initial public offerings

Using a sample of Finnish initial public offerings, we find that the fraction of equity retained by the original shareholders is significantly positively related to the market-to-brook ratio. The result is consistent with the Leland and Pyle (1977) hypothesis suggesting that the original shareholders can signal the quality of their firm by their willingness to retain equity. Moreover, we find that management ownership's association with relative firm value is significantly positive at low ownership levels but insignificant at high ownership levels. This gives some support for the agency hypothesis which suggests that corporate value is a function of managerial equity ownership.     

Capital structure,equity mispricing,and stock repurchases

We evaluate motives for share repurchases using a unified framework where a firm has a target capital structure and has equity that can be mispriced. We document that capital structure adjustments are a value-increasing motive for repurchases and that the extent to which adjusting capital structure through a repurchase creates value depends on the undervaluation of the firm. Underlevered and undervalued firms enjoy the greatest economic gains from a repurchase, as evidenced by the stock price reaction to the repurchase announcement, and these firms are more likely to announce a share repurchase program.     

The effects of ownership structure on dividend policy: Evidence from seasoned equity offerings (SEOs)

This paper examines the effects of ownership structure on dividend policy, specifically the role of controlling shareholders in shaping dividend policy in a sample of firms that pay dividends and issue new equity simultaneously. The results show that managers in weakly governed firms are more likely to initiate customized dividends to meet outside large shareholders' needs while simultaneously using costly external capital to finance new investment projects. This paper contributes to the existing literature on agency problems by explaining why firms engage in this suboptimal dividend policy: it allows large shareholders to extract private benefits.     

Investment opportunities and Irish equity offerings

Numerous empirical studies confirm that the stock market reacts negatively to the announcement of an equity issue. Yet some seasoned offerings occasion a positive market response. Studies investigating the differentiation of positive from negative responses should contribute to our understanding of both market and firm behaviour. In addition, few studies to date have examined market responses in other institutional and/or geographical settings. A sample of 95 open offerings by Irish firms between 1987 and 1994 is investigated and, surprisingly, a neutral market response is discovered. The hypothesis that a positive market response is due to a firm's growth opportunities is tested. The intuition underlying this growth opportunity hypothesis is that investors perceive the potential gain in growth opportunities and willingly fund such investments. The Irish evidence supports this hypothesis. It is conjectured that the lack of a long-term debt market in Ireland may explain these results.     

CEO ownership, external governance, and risk-taking

This paper shows the relation between CEO ownership and firm valuation hinges critically on the strength of external governance (EG). The relation is hump-shaped when EG is weak, but is insignificant when EG is strong. The results imply that CEO ownership and EG are substitutes for mitigating agency problems when ownership is low. However, very high levels of share ownership can reduce firm value by entrenching the CEO and discouraging him from taking risk, unless mitigated by strong EG. We identify channels through which CEO ownership affects firm value by examining R&D, which is discretionary and risky. We find CEO ownership similarly exhibits a hump-shaped relation with R&D when EG is weak, but no relation when EG is strong. Our results are robust to endogeneity issues concerning CEO ownership and EG.     

Policy uncertainty and seasoned equity offerings methods

Based on a sample of U.S. seasoned equity offering (SEO) during the period 2002–2017, we examine how the choice of equity issuance method changes in response to policy uncertainty. We find that firms subject to high policy uncertainty are less likely to use accelerated offerings rather than other types of traditional seasoned equity offerings. Our results are robust to alternative variable specifications, propensity score matching method, IV approach, and the inclusion of additional controls. Also, the effect of policy uncertainty on accelerated offering decision is weaker for firms with better information environment, earnings quality, and governance structures. Further, policy uncertainty increases the cost of funds and lowers long-run abnormal returns after SEOs for firms subject to high levels of policy uncertainty.     

Underwriter choice and earnings management: evidence from seasoned equity offerings

Using a sample of seasoned equity offerings (SEOs), this paper examines the association between the choice of financial intermediary and earnings management. We contend that with more stringent standards for certification and intense monitoring, highly prestigious underwriters restrict firms’ incentives for earnings management to protect their reputation and to avoid potential litigation risks, while firms with greater incentives for earnings management avoid strict monitoring by choosing low-quality underwriters. Consistent with our predictions, we find an inverse association between underwriter quality and issuers’ earnings management. In addition, we find that underwriter quality is positively related to SEOs’ post-issue performance, even after controlling for the effect of earnings management. We also find that firms with low-underwriter prestige and high levels of earnings management under-perform the most. However, the effect of underwriter choice on post-issue performance does not last long.

Audit quality and seasoned equity offerings methods

Using a sample of U.S. seasoned equity offering (SEO) during the period 2002–2017, we document that audit quality is associated with SEO issuance method choice. Specifically, firms with higher quality auditors are more likely to adopt the accelerated offerings issue method instead of using other seasoned equity offering methods. We also identify that audit tenure and industry audit specialization influence the relation between audit quality and the likelihood of undertaking accelerated SEO offerings, and that the relationship is more pronounced in the presence of weaker firm-level information and governance environments. Extending from the conclusion that accelerated offerings serve as a quality certification mechanism, we also find that firms completing accelerated offerings enjoy lower audit fees in subsequent years. These firms also exhibit superior post-SEO-issue long-term abnormal stock performance. Overall, our study shows that the certifying and monitoring role of auditors is valuable to clients, underwriters, and investors in SEO transactions.     

Capital structure,equity ownership and firm performance

This paper investigates the relationship between capital structure, ownership structure and firm performance using a sample of French manufacturing firms. We employ non-parametric data envelopment analysis (DEA) methods to empirically construct the industry’s ‘best practice’ frontier and measure firm efficiency as the distance from that frontier. Using these performance measures we examine if more efficient firms choose more or less debt in their capital structure. We summarize the contrasting effects of efficiency on capital structure in terms of two competing hypotheses: the efficiency-risk and franchise-value hypotheses. Using quantile regressions we test the effect of efficiency on leverage and thus the empirical validity of the two competing hypotheses across different capital structure choices. We also test the direct relationship from leverage to efficiency stipulated by the Jensen and Meckling (1976) agency cost model. Throughout this analysis we consider the role of ownership structure and type on capital structure and firm performance.     

Target CEO age,ownership decisions,and takeover outcomes

This paper examines the effect of target CEO age, in association with target corporate governance mechanisms, on the ownership decisions and takeover outcomes in eight East and Southeast Asian countries. The results show that acquirers are more likely to select partial-control acquisitions of target firms managed by older CEOs, and that the impact of target CEO age on the partial-control acquisition propensity is much stronger in emerging markets relative to developed economies. The study further finds that target CEO age leads to a lower probability of obtaining desired equity ownership levels compared to unmatched ownership achievements, controlling for target corporate governance structures. The findings also run robustness checks regarding variations in the compulsory acquisition cut-off in the sample countries. Overall, this paper adds to the growing of mainstream corporate governance literature regarding the relevance of CEO personal characteristics in agency problems for corporate decisions.     

Managerial hedging,equity ownership,and firm value

Suppose risk‐averse managers can hedge the aggregate component of their exposure to firm's cash‐flow risk by trading in financial markets but cannot hedge their firm‐specific exposure. This gives them incentives to pass up firm‐specific projects in favor of standard projects that contain greater aggregate risk. Such forms of moral hazard give rise to excessive aggregate risk in stock markets. In this context, optimal managerial contracts induce a relationship between managerial ownership and (i) aggregate risk in the firm's cash flows, as well as (ii) firm value. We show that this can help explain the shape of the empirically documented relationship between ownership and firm performance.     

Firm diversification and earnings management: evidence from seasoned equity offerings

Popular press suggests that diversified firms are more aggressive in managing earnings than non-diversified firms. We examine this claim in the seasoned equity offering (SEO) setting, where firms have been shown to have the incentive to manage earnings upwards. Using the cross-sectional modified Jones [(1991) J Accounting Res 29:193–228] model to measure discretionary current accruals, we find that discretionary current accruals are higher among diversified firms than in non-diversified ones. Our evidence is consistent with the view that the extent of firm diversification is directly related to the degree of earnings management. We further show that diversified issuers with high discretionary accruals underperformed other SEO firms.

Blockholding and market reactions to equity offerings in China

We examine the impact of blockholding on shareholders' wealth in equity offerings in China. We find that investors generally react negatively to equity-offering announcements by firms with high blockholding. A one-standard-deviation (12%) increase in blockholding leads to a 0.59% reduction in firm valuation over a seven-day window and a 5.50% reduction over a 2-year period surrounding the announcement. Private (non-governmental) blockholding is associated with a more negative valuation effect than governmental blockholding over the long-term event window. The above result holds only for financially constrained firms but not unconstrained firms. Further analysis shows that firms with private blockholding have greater positive cash–cash flow sensitivity than firms with governmental blockholding, and again, the result holds for financial constrained firms only. Collectively, the findings suggest that equity offerings in China signal the issuers' future financial constraints, but the findings do not support the agency hypothesis of state ownership.     

Corporate equity ownership, investment, and product market relationships

This paper examines the effect of corporate equity ownership on investment when firms have product market relationships. Firms have incentives to hold long equity positions when their products are complements. These equity positions induce the firms to increase their real investment expenditures. In contrast, firms have incentives to hold short equity positions when their products are substitutes. These short positions commit the firms to a more aggressive product market stance, and also result in increased real investment expenditures. Our model offers an explanation for the empirical relationship between the establishment of corporate equity stakes and increased investment spending documented by Allen and Phillips (2000).     

Knowledge transfer and partial equity ownership

An alliance often involves one firm acquiring an equity stake in its alliance partner. We explore oligopoly models that capture the link between knowledge transfer and partial equity ownership (PEO), where alliance partners can choose the level of PEO. PEO can increase the alliance partners' profitability by inducing knowledge transfer, but the PEO itself reduces their joint profit because it induces other firms to take more aggressive actions. This trade‐off endogenously determines the level of PEO, which can benefit consumers and/or improve welfare. Given the growing antitrust interest in PEO, we explore the antitrust implications of our analysis.