Heterogeneous Beliefs and Return Volatility Around Seasoned Equity Offerings (SEOs)

Abstract

This study provides an explanation for the volatility timing “puzzle” identified in the Seasoned Equity Offering (SEO) market. Our key conjecture is that the volatility dynamics around seasoned equity issuance reflects the time-varying heterogeneous beliefs of investors about the future prospects of the issuing firm. Consistent with this conjecture, we find that the heterogeneous beliefs of investors, as proxied by analyst forecast dispersion, is a significant determinant of SEO firm volatility around the event window. We obtain similar results using a more direct trade-based belief measure constructed using actual institutional trades. Further, the relation between heterogeneous beliefs and firm volatility tightens as the short selling activity increases, which suggests a potential causal link between heterogeneous beliefs and return volatility.