Equity Offerings Research Articles

Blockchain mania: A perspective on corporate executive opportunism

This study investigates whether investors' overreactions to blockchain-related announcements is driven by corporate executive opportunism in the Chinese capital market. We manually collect blockchain-related announcements made by Chinese listed firms over 2016–2022 and conduct an event study to estimate market reaction. The announcements are further categorized as value-driven and speculation-driven announcements. Although both announcement types elicit positive short-term market reactions, the long-term reactions to speculation-driven announcements fade and even reverse, while the value-driven ones remain positive. Additionally, we determine that speculation-driven announcements are followed by seasoned equity offerings, negative news releases, and reductions in the stockholdings of large shareholders and executives, suggesting corporate executive opportunism. Finally, we demonstrate the efficacy of internal and external corporate governance in reducing corporate executive opportunism. Our study sheds light on market reactions to blockchain-related announcements from the perspective of executives’ opportunism.

Seasoned Equity Offerings and Firm Workplace Safety

Seasoned Equity Offerings and Firm Workplace Safety

Long Run Performance of Rights Issues and FPOs: Evidence from India

In this article, we study the long run equity performance of Indian firms which issued Seasoned Equity Offering (SEO) during the period January 2010–December 2022. With a sample of 177 such SEO issuing firms, we show that the long run equity performance of these SEO issuing Indian firms have been significantly inferior compared to firms from the same industry which are similar w.r.t other parameters like size, age and price-book ratio. Investing in an SEO at the close of the first trading day and holding it for 5 years, on an average, gave 17% (3% on an annualised basis) fewer returns than comparable firms. This pattern is more or less independent of the market conditions (bull or bear) except for a brief period during the global financial crisis. The study’s findings suggest that Indian firms that issue SEOs may be underperforming their industry peers over the long term. This could be due to a number of factors, such as the companies raising capital for dilutive purposes, using the proceeds to invest in underperforming projects, or facing challenges in integrating new equity into their existing business operations. Additionally, the study’s findings highlight the importance of careful consideration of long-term performance when evaluating investment opportunities in SEOs. To further explore the factors contributing to the underperformance of SEO-issuing firms, future research could investigate the specific reasons for their lower returns, analyze the impact of different types of SEOs (e.g., rights issues vs. follow-on public offerings) on long-term performance, and examine the role of market timing and investor sentiment in influencing the performance of SEOs.

Does Absence of Insider Trades Before Seasoned Equity Offerings Provide Information to the Market?

This study analyzes the interaction effect of short and long-run performance and insider trading with 1,099 seasoned equity offerings(SEOs) announced between 2004 and 2020. The major results of this study are as follows. First, insiders are net sellers prior to SEOs and the relationship between insider’s net purchase ratio and announcement effects is significantly positive. Second, the positive relationship holds only for net sell group, not for net buy group. Third, compared to firms in net sell group and net buy group, those in no trade group are marginal firms with worse operating performance, higher probability of delisting, smaller size, and lower return before SEOs, and lower ownership by largest shareholders. Fourth, regression analysis shows that announcement effect and long-run performance of no trade group is significantly more negative than net sell group and net buy group. To summarize, “dog that did not bark” effect exists in insider trading before SEOs and the absence of insider trades provide valuable information to the market.

The role of media connections in seasoned equity offerings

AbstractWe present evidence that corporate connections to the media are associated with a greater likelihood of a seasoned equity offering (SEO), more negative announcement returns, and poorer long‐term performance. The effect of media connections on announcement returns is more pronounced for firms with higher information asymmetry, greater financial constraints, and lower advertising expenditures. Media connections are positively associated with media coverage and sentiment before the SEO announcements. Our findings are consistent with the notion that SEO issuers use their connections with media firms to actively manage media coverage and successfully offer new equity.

Retracted: Empirical Research on Seasoned Equity Offerings, Board Member Characteristics, and Corporate Investment Efficiency

Retracted: Empirical Research on Seasoned Equity Offerings, Board Member Characteristics, and Corporate Investment Efficiency

External financing, technological changes, and employees

Abstract Using exogenous shocks on the ability to issue seasoned equity offerings (SEOs), we show SEOs lead to a higher employee skill composition, that is, a lower (higher) proportion of low (high) skilled workers. The decrease in low-skilled workers exceeds the increase in high-skilled workers, resulting in reduced employment at the firm level. These effects are more significant when firms invest more in technology following SEOs and face greater financial constraints before SEOs, suggesting that SEOs relieve budget constraints on technology investments. These findings demonstrate that while external equity financing helps upgrade technology to improve productivity, it has a dark side for low-skilled workers.

How financial literacy moderates the relationship between qualitative business information and the success of an equity crowdfunding campaign: Evidence from Mediterranean and Gulf Cooperation Council countries

This paper presents empirical evidence suggesting that financial literacy moderates the inverted U-shaped relationship between the amount of qualitative business information provided and the success of an equity crowdfunding campaign. Drawing on a sample of 807 equity offerings posted on 26 platforms operating in 6 Mediterranean and Gulf Cooperation Council countries (Cyprus, France, Israel, Italy, Turkey and the United Arab Emirates), the findings indicate that higher levels of financial literacy amplify the positive effect of more comprehensive qualitative business information. However, once a qualitative business information threshold is crossed, financial literacy results related to observed negative returns are even more substantial. These results, rooted into the signalling and information overload theoretical frameworks, offer valuable insights for entrepreneurs, platform administrators, investors and policymakers.

Unraveling market mysteries: a comprehensive review of financial anomalies and puzzles

This comprehensive literature review consolidates various market anomalies and puzzles, providing an aggregated perspective to understand these complex dynamics that challenge the traditional Efficient Market Hypothesis. We examined numerous academic works to reveal insights into long-term return irregularities, earnings management influence on equity offerings, and information uncertainty’s impact on stock returns. The review delves into unique phenomena like persistent mutual fund performance, the day-of-the-week returns, the January effect, weather-induced mood shifts on the market, and the dynamics of multiple anomalies. International asset pricing and weekend anomalies were also discussed, with a particular focus on cryptocurrency efficiency. Incorporating behavioral finance perspectives, we explored social transmission bias, emotional finance, biased beliefs, investor optimism, sentiment, and global market inefficiencies. The influence of unique events and seasonal factors, such as the Super Bowl, daylight saving time, and the Halloween effect, were also analyzed. The review concludes by highlighting the evolving landscape of market anomalies, discussing ma- chine learning approaches to anomaly research, investor behavior challenges, and the disappearing anomalies in country and industry returns. It sets the groundwork for holistic comprehension of market anomalies, suggesting future research directions such as exploring new data sources, comprehensive theoretical modeling, and the role of technology, market regulations, and environmental changes on market anomalies.

Real Earnings Management during Economic Downturns

ABSTRACT This study examines the impact of economic downturns on real earnings management activities in an international setting. Using a sample of 27 countries between 1988 and 2016, I find that the extent of real earnings management increases and that the substitution relation between real earnings management and accrual-based earnings management becomes stronger during economic downturns. Managers tend to rely on real earnings management to avoid the threat of greater scrutiny during economic downturns. The effect of an economic downturn on real earnings management is stronger for firms with high earnings management incentives, such as to avoid reporting earnings decreases and losses, to just meet or beat analysts’ earnings forecasts, and to facilitate the success of seasonal equity offerings. The findings suggest that real earnings management comes at a high cost. Firms sacrifice future performance when engaging in real earnings management. Data Availability: Data are available from the public sources cited in the text. JEL Classifications: G14; G28; G39; M41.

The Founder certification effect, firm disclosures, and the cost of SEO financing

AbstractWe investigate the effect of founder control on firms’ financing costs for seasoned equity offerings (SEOs). Firms issuing SEOs are subject to increased information asymmetry and associated agency conflicts. We hypothesize that founder control has a certification effect that mitigates such problems, and consequently, reduces the cost of issuing SEOs. Consistent with our prediction, firms with founder control enjoy higher abnormal announcement returns and lower SEO gross spreads. We also show that founder firms have better post‐SEO operating performance than non‐founder firms. Additionally, we document that the founder certification effect is more salient among firms with poorer pre‐SEO operating performance and those that do not disclose specific use of the SEO proceeds. Finally, we show that founder firms do not increase the frequency of management earnings forecasts as much as non‐founder firms prior to the SEO. Our results are robust to a battery of sensitivity analyses, and our conclusions are consistent with the founder certification effect.

Using REIT Follow-on Equity Offerings to Pay down Credit Line Balances: Bank Certification or Monitored Financial Flexibility?

Using hand collected data from offering prospectuses and other corporate filings, we examine the market response to real estate investment trust (REIT) follow-on stock offerings’ stated uses of proceeds. We also track REIT banking relationships over time. Consistent with the idea of bank certification, we show that markets react relatively favorably to REIT equity offers where issuers have lending relationships with affiliates of the underwriters. However, we also find that reactions are most favorable where REIT issuers intend to repay their bank’s line of credit, regardless of the bank’s affiliation with the underwriters. This pattern is particularly strong among smaller firms with lower institutional ownership. We posit that credit line repayments preserve benefits of bank monitoring while enhancing financial flexibility. Further examination reveals that this monitored financial flexibility is the dominant effect.

Social capital and the pricing of initial public offerings

Using a large sample of 4,892 IPOs in the United States, we establish that the level of social capital in the county of the IPO firm's headquarters is negatively associated with the level of IPO underpricing. The results hold for a range of robustness tests, including those addressing endogeneity. Additionally, the relation between social capital and IPO underpricing is weaker among IPO firms with less information uncertainty and stronger for IPO firms with more agency problems. We also show that social capital affects IPO underpricing through changing IPO firms’ earnings management activities. Further, high social capital is associated with a higher likelihood of the IPO being oversubscribed, higher total proceeds raised in the IPO, a greater number of IPO shares issued, and lower total IPO administrative fees. Social capital also influences seasoned equity offerings (SEOs), in the form of lowering SEO underpricing and SEO discount. Overall, our results demonstrate the importance of social capital as an informal contracting mechanism in enhancing the pricing and performance of firm securities issuance.

Do Cost Behaviors Affect Cost of Equity: Evidence from Seasoned Equity Offering?

AbstractThis study investigates the impact of firms' cost behavior on their seasoned equity offering (SEO) performance. The empirical findings show that cost‐stickier SEO firms experience more negative SEO cumulative abnormal returns (CARs). The economic mechanism of this association is that cost‐stickier SEO firms deal with higher information asymmetry and issue fewer debts, which reduce their SEO CARs. SEO firm cost behavior also affects corporate SEO decisions and announcement returns in different life cycles. Among the three economic mechanisms, the information asymmetry channel has been found as the dominant one. This study also indicates that cost‐stickier firms are less likely to conduct SEOs than their counterparts. In contrast, the motivation for Chinese SEO issuance for cost‐stickier firms is market timing rather than adjusting the capital structure or financing for investment and growth. Additionally, the negative impact of cost stickiness on corporate SEO returns is less pronounced for firms associated with industry‐specialized auditors and greater corporate governance capacity but more substantial for SEO firms with higher free cash flow. All main findings are consistent in a number of endogenous tests, including the two‐stage least squares test, the generalized method of moments estimation, and the control of alternative fixed effects. These conclusions also passed several robustness tests such as an alternative factor model and event windows and an alternative proxy of cost stickiness.

How do investors underreact to seasoned equity offerings? Evidence from Taiwan's corporate governance evaluation

This study examines whether long-run stock underperformance following seasoned equity offerings (SEOs) differs with a firm's corporate governance practices. We address this issue by using Taiwan's official annual corporate governance evaluation to represent the quality of firm governance. Results show that firms with better governance exhibit positive long-run post-SEO stock performance, whereas those with poor governance continue to be underperforming after SEOs. Our findings reveal that investor’ underreaction to SEOs varies with the levels of corporate governance.

Stock hyping before auction-style SEOs: Are primary market investors misled?

This study investigates the stock price pattern around seasoned equity offerings and the response of primary market investors to such a price pattern in an environment with weak investor protection. Using a sample of 1670 auction-style SEOs in China, we find stock prices exhibit an inverted-V pattern around SEO issue dates, increasing significantly before, peaking at, and then declining dramatically after issue dates. Further analysis shows that this price pattern can be explained by the managerial hyping hypothesis. With detailed information on investor bids submitted in the auctions, we find that investors' bid prices decrease while SEO discounts increase with pre-SEO price run-ups, indicating that primary market investors could identify SEO issuers' stock hyping tactic and react by submitting more conservative bid prices. We conclude that SEO issuers condition the market around SEO issue dates but this tactic does not help reduce issuers’ financing costs.

IPO suspension and pricing: Evidence from China

AbstractSecurities regulators in China occasionally suspend their IPO market. We explore the impact of IPO market suspension on IPO pricing. We find that IPOs interrupted by market suspensions are eventually priced at a higher level. The positive impact of IPO suspension on IPO offer price is more pronounced for IPOs backed by venture capitalists (VCs) and/or those with higher VC ownership. Further, we find that IPOs affected by market suspensions show poorer post‐IPO performance, and higher post‐IPO earnings management. Suspension‐affected firms ask for lower offer prices on seasoned equity offerings (SEOs) if they price their IPO shares at a higher level. Combined, our findings suggest that IPO suspensions result in an unexpected wealth transfer from secondary market investors to pre‐IPO investors, and thus the higher offer price for suspension‐affected IPOs is a manifestation of the wealth transfer.

Do Banks Conduct Earnings Management Prior to Seasoned Equity Offerings to Meet Capital Adequacy Regulation?

Do Banks Conduct Earnings Management Prior to Seasoned Equity Offerings to Meet Capital Adequacy Regulation?

What Information Implied in the Equity Offering Mechanism with Market Timing Considerations?

What Information Implied in the Equity Offering Mechanism with Market Timing Considerations?

The Association between PCAOB Inspection Reports and Seasoned Equity Offering Discounting

SUMMARY We examine the association between Public Company Accounting Oversight Board (PCAOB) inspection reports and a firm’s cost of equity capital, measured using seasoned equity offering (SEO) discounting. SEO discounting occurs when the offer price is lower than the prior day’s market price of the firm’s shares and represents “money left on the table” for issuing firms. We document an economically significant, positive association between SEO discounting and the use of an auditor found to be deficient by the PCAOB for clients of triennially inspected auditors. Cross-sectional evidence suggests that this relation is stronger for clients with lower analyst following and disclosed material weaknesses in financial reporting controls, and weaker if the auditor issues a going concern modification. Our evidence is consistent with PCAOB inspections providing meaningful information about audit quality to market participants, particularly for clients of smaller, triennially inspected auditors. Data Availability: All data are from publicly available sources. JEL Classifications: M42.