Seasoned Equity Issuers’ R&D Investments: Signaling or Over-Optimism

Abstract

It is well-known that investors often react negatively to the announcements of seasoned equity offerings (SEOs). We posit that issuers can use positive discretionary (higher-than-expected) RD these issuers are more likely to use new capital in future RD and they produce better post-SEO operating performance. In contrast, we find some evidence of managerial over-optimism among low-tech issuers: Investors tend to penalize low-tech firms with positive discretionary RD they are more likely to hold new capital as cash; and they fail to produce better post-SEO operating performance.