Cost asymmetry around seasoned equity offerings

Abstract

We examine the asymmetric cost behaviour of firms during seasoned equity offerings (SEOs). Using a sample of US firms that issued SEOs over the period 1995–2020, we find a reduction in cost asymmetry for SEO firms. We also demonstrate that managerial resource adjustment decisions are driven by stronger external monitoring instead of managerial entrenchment. We find that competent managers make efficient resource adjustments, but they are able to do so when they operate under excess capacity. Further, we find that SEOs retain slack resources when demand declines in periods following the SEO. Finally, we find that the lower cost asymmetry during SEOs improves future firm performance. Our results are robust to several categories of cost, different measures of firm performance and different model specifications. This study contributes to the literature by documenting managerial cost management decisions around SEOs.