Abstract
While the literature finds that R&D management is used to inform investors, it is unclear how R&D manipulation affects pricing in security issuance because R&D management and its motives are difficult to detect. Using a group of Chinese listed companies that conducted seasoned equity offerings (SEOs) between 2007 and 2020, we examine the effect of inefficient R&D investment on SEO pricing. Our results affirm the mechanism of misleading by utilizing information asymmetry and show that under-investment in R&D drives up SEO prices, especially in firms with low profitability; over-investment in R&D would also raise SEO prices, but only for R&D-intensive industries. However, these impacts are weakened when information asymmetry is reduced. Internal investor subscription and external analyst coverage improve the information environment and suppress the information effect of inefficient R&D investment on SEO pricing.
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