New Evidence on the Timing, Investment and Liquidity Motivations for Public Equity Offers

Abstract

This study examines the motivations for seasoned equity offering and the decomposition strategy that breaks the book-to-market ratio into misvaluation and growth components. In logit-based tests, we find strong support for the misvaluation explanation, which predict that firms issue when equities are overvalued. However, the growth component runs counter to conventional wisdom as a proxy for investment opportunities and obscures a more complicated relationship between the accounting for operating and financing activities (leverage). Given a low book-to-value ratio, two groups of firms are both likely to conduct an SEO: one with low operating growth and positive leverage, whereas another group with high operating growth and negative leverage. Apart from market timing, the former is also motivated from a demand for liquidity whereas the latter is consistent with an investment-based explanation. Finally, we document evidence that issuers with low growth opportunities and/or high overvaluation are more likely to issue combined or pure secondary shares rather than primary shares.