Seasoned Equity Offerings and the Cost of Market Timing

Abstract

Equity offerings are usually characterized by large information asymmetries between issuers and investors. This paper examines whether investors form beliefs of corporate intentions based on the outcomes of past issues by the same firm. While average post-SEO abnormal returns are negative, I find a large dispersion across issuers, with 40% being positive. Both firms with genuine investment opportunities and those with overvalued equity have similar ex ante characteristics, restricting potential investors’ ability to tell them apart. I find evidence, however, suggesting that investors use the information contained in the post-issue returns to adjust their opinion of the issuer’s intentions in a follow-on offering, captured in the underpricing of the issue. These findings highlight the importance of past outcomes for the formation of investor expectations about corporate intentions.