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.     

The marketing of seasoned equity offerings

In an accelerated seasoned equity offering (SEO), an issuer foregoes the investment bank's marketing efforts in return for a lower fee. To explain why many issuing firms choose a higher cost fully marketed offer, we posit that the marketing effort flattens the issuer's short-run demand curve. Alternatively stated, with a fully marketed offer, the issuer is paying investment bankers to create demand, making the elasticity of demand at the time of issuance an endogenous choice variable. Empirical analysis shows that both the pre-issue elasticity of the issuing firm's demand curve and the offer size are important determinants of the offer method choice. We find evidence of a large transitory increase in the elasticity of demand for issuers conducting fully marketed SEOs.     

The role of institutional investors in seasoned equity offerings

Do institutional investors possess private information about seasoned equity offerings (SEOs)? If so, do they use this private information to trade in a direction opposite to this information (a manipulative trading role) or in the same direction (an information production role)? We use a large sample of transaction-level institutional trading data to distinguish between these two roles of institutional investors. We explicitly identify institutional SEO allocations for the first time in the literature. We analyze the consequences of the private information possessed by institutional investors for SEO share allocation, institutional trading before and after the SEO and realized trading profitability, and the SEO discount. We find that institutions are able to identify and obtain more allocations in SEOs with better long-run stock returns, they trade in the same direction as their private information, and their post-SEO trading significantly outperforms a naive buy-and-hold trading strategy. Further, more pre-offer institutional net buying and larger institutional SEO allocations are associated with a smaller SEO discount. Overall, our results are consistent with institutions possessing private information about SEOs and with an information production instead of a manipulative trading role for institutional investors in SEOs.     

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.     

Information spillovers around seasoned equity offerings

We examine information spillovers in the context of seasoned equity offerings (SEOs). Rival firms react significantly positively (0.26%) to primary SEO announcements, indicative of a competitive effect, but negatively (− 0.35%) to secondary share announcements, which is evidence of a contagion effect. Consistent with the view that primary equity offerings signal favorable industry prospects because firms presumably issue new shares to invest in profitable projects, we find that the rival response is positively related to analysts' EPS growth forecasts. However, when insiders are selling their shares through a secondary offer, this may suggest overvaluation and thus negatively impacts rival firms. Consistent with this view, we find when VCs sell through a secondary offerings, rivals experience a more significant negative reaction. We find rival firms are more likely to follow their peers and conduct a primary SEO if the market reacts favorably to their peer's SEO announcement. Finally, rival firms outperform secondary share issuers of equity, but not primary share issuers. Collectively, the findings support the view that insiders take advantage of windows of opportunity when they sell their own shares, but not when they raise capital for investing purposes.     

The announcement impact of seasoned equity offerings on bondholder wealth

Previous studies document a negative return to equity on the announcement of an SEO. However, the effects of SEO announcements on bonds have received little attention. We find that bondholders experience a significant positive return on the announcement of an SEO and this effect is more pronounced for bonds with lower ratings. We examine alternate explanations for bond market reactions to SEO announcements including the leverage risk reduction, wealth transfer, and information signaling hypotheses. Overall, our results are most consistent with the leverage risk reduction hypothesis.     

Understanding seasoned equity offerings of Chinese firms

We examine the empirical relevance of standard theories explaining the motivation of Seasoned Equity Offerings (SEOs) in the Chinese context. Analyzing Chinese SEOs during 1994-2008 and controlling for other factors reflecting features of Chinese corporate finance, we find that Chinese SEOs are mostly motivated by timing the market. Financing for investment and growth receives weak empirical support. We do not obtain any consistent evidence supporting both the tradeoff and the agency theories. In addition, we find that the firm’s SEOs behavior varies between rights issues and public offerings and across different periods along with the progress of China’s market transition. Our results show that Chinese listed firms in general behave similarly as their counterparts in other countries concerning SEOs decisions in that they issue SEOs when there are opportunities to take advantage of market overvaluation. These results are consistent with the well-documented convergence trend of corporate SEOs behavior of firms around the world. In addition, our findings challenge the conventional perception on Chinese SEOs that controlling shareholders use SEOs as a means to expropriate minority shareholders.     

The information content of insider trading around seasoned equity offerings

This paper examines insider trading around seasoned equity offering (SEO) announcements in Hong Kong. The announcements of private placings (rights offerings) are associated with positive (negative) abnormal stock returns. However, longer-term stock returns are negative for both private placings and rights offerings. In general, insiders are net purchasers in placing firms in the 6 months prior to and 6 months subsequent to the SEO, whereas insiders are net sellers in rights issue firms in the 6 months prior to and 6 months subsequent to the issue. The net purchases made by the insiders of firms making placements help them maintain their control rights, which are otherwise diluted by the placements. Insider trading does not explain longer-term investment returns.     

The performance of new equity offerings in Hungary and Poland

This paper documents the short- and long-run price performance of 103 initial public offerings (IPOs) in Poland and 33 in Hungary during the 1991–1998 period. The empirical analysis reveals significant first-day underpricing of 15.12% in Hungary and 54.45% in Poland. The long-run performance of the new offerings in these markets is less conclusive. The cross-section regression analysis finds that market momentum is a significant and primary determinant of initial returns in both countries. The evidence suggests that over the study period, the degree of underpricing is determined by the intensity of demand driven by investor interest where offering prices do not fully adjust to the prevailing market conditions.     

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.     

Institutional investors' holdings surrounding equity rights offerings

We examine shareholding surrounding Swedish rights offerings using detailed information on the ownership in firms. We analyze shareholding levels and their changes for domestic and foreign institutional investors. As institutional holdings change, domestic institutions increase their holdings more than foreign institutions. Our examination of low and high buying activities by institutional investors surrounding rights offerings shows no stock picking ability, thus not supporting the “smart-money hypothesis” (Gibson et al., 2004). We also find that investor domicile influences firm value following the offering. Overall, foreign investors exhibit a strong and opposite directional reaction to adverse selection costs than domestic investors.     

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.     

Bought deals: The value of underwriter certification in seasoned equity offerings

The bought deal is the predominant method of underwriting SEOs in Canada. Offer prices are set and underwriters commit to purchase offerings several days earlier for bought deals than for firm commitment issues, implying stronger underwriter certification for bought deal issues. Consistent with the certification hypothesis, this study finds a significantly smaller negative stock price reaction around the announcement of bought deals compared to firm commitment issues. Bought deals are further shown to have smaller offer price discounts and smaller underwriting fees, implying superior pricing and thus, higher quality offerings. These findings suggest that investment banks’ underwriting method of choice is informative of issue quality.     

Local corporate misconduct and local initial public offerings

This paper investigates the cost of going public through initial public offerings (IPOs) for firms located in regions with significant fraud density. We find that companies in regions with a high proportion of nearby firms that have committed corporate misconduct have more pronounced underpricing, experience higher post-IPO stock return volatility, and are more likely to withdraw their offerings. Overall, our results show that local corporate misconduct is associated with the pricing of IPOs, and the breach of trust is related to costly IPOs for newcomers.     

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.     

Influence of media coverage and sentiment on seasoned equity offerings

This article examines the role of media in seasoned equity offerings (SEOs) price and market reactions on SEO announcements. Using a sample of SEO deals in UK, we find that media coverage is significantly and negatively related to SEO price discounts and market returns around SEO announcements. Moreover, we document that more pessimistic media sentiment predicts larger SEO price discounts and more negative market reactions to SEO announcements. In summary, both media coverage and media sentiment influence investor decisions in SEOs, but through different mechanisms.     

Behavior of liquidity and returns around Canadian seasoned equity offerings

Spread costs and their adverse selection and temporary components for Canadian SEOs follow an approximate V-shaped pattern with a trough at the closing window. Enhanced ownership diffusion partly explains the decrease in these spread costs post-SEO completion versus pre-SEO announcement. SEO spread costs decrease after the April 1996 TSX decimalization. The adverse selection cost of privately-placed Canadian SEOs decreases after Multilateral Instrument 45-102 reduced the lock-up period to four months in 2001. Consistent with results for non-US SEOs, negative abnormal returns (ARs) occur in announcement windows for undifferentiated SEOs. ARs are significantly different for public (significantly negative) versus private (insignificantly positive) SEOs consistent with their associated differential reductions in information asymmetry. Conditional residual volatilities decrease post-announcement, consistent with a diminished temporary spread cost and expected behavior following an unanticipated event.     

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.