Strategic Disclosure, Analyst Behavior and Equity Flotation Costs

Abstract

We document that the quality of public and private information available to investors improves before seasoned equity offerings (SEO) but deteriorates shortly thereafter. As firms improve their financial communication, analyst earnings forecasts become more accurate and less biased. However, forecast optimism increases after the offering. Firms that enhance the quality of their public information before SEOs increase the likelihood of the offering being a success and reduce the costs of raising finance: underwriters are more likely to exercise their overallotment option, which increases the issue proceeds beyond the prospectus amount, and the underwriting fee decreases. Changes in private information quality induce higher information asymmetry between informed and uninformed investors, increasing flotation costs. The results are robust to controlling for endogeneity in the offering size and underwriter quality. Our findings are consistent with firms strategically improving their information disclosure around seasoned equity issues.