Equity Misvaluation and SEO Initiation in China

Abstract

ABSTRACT Taking advantage of the regulative environment of seasoned equity offerings (i.e., SEOs) in China, we examine the dynamics of stock valuation in the lifecycle of SEOs, and their relationship with firms initiating SEOs. Employing various valuation approaches, we find robust evidence that SEOs are persistently overvalued. We also find that managers are more likely to initiate SEOs when their persistently overvalued stock prices are in an ascending channel. Our findings suggest that timing-seeking managers are conservative in initiating SEOs under the regulative screening. However, managers with remarkable market timing ability can beat the market and issue seasoned shares in overvalued prices.