Seasoned Equity Offerings Firms Research Articles

Overinvestment and the Operating Performance of SEO Firms

Prior studies have documented that firms' operating performance deteriorates following seasoned equity offerings (SEOs). This paper proposes and empirically tests the hypothesis that this poor performance is the result of managers' overinvestment. I find that, subsequent to the offering, SEO firms tend to invest more heavily than nonissuing control firms that are in the same industry and have enough financial slack and similar investment opportunities. More importantly, I find a negative correlation between postissue investment and operating performance, controlling for investment opportunities and preissue performance. Overinvestment results in a reduction in asset productivity and is more severe for firms with relatively fewer investment opportunities.

Comparing the Characteristics and Performance of Private Equity Offering Firms with Seasoned Equity Offering Firms

This paper examines why the majority of private placements of equity sell at substantial discounts, while a few sell at premiums. We compare private equity offering (PEO) firms with comparable seasoned equity offering (SEO) firms and find that PEO firms had poorer financial performance than SEO firms both prior and subsequent to the year of issue. Furthermore, PEO firms typically showed signs of financial distress prior to the equity issue. Our results also indicate that the holding period returns on investments in PEO firms were substantially below returns on the market index and worse than those of SEO firms. The financial characteristics and the holding period returns of PEO firms issuing at a price premium were found to be significantly better than those that sold at a discount. The private equity premiums may reflect risky future growth opportunities as well as potential takeover premiums.

Firm diversification and earnings management: evidence from seasoned equity offerings

Popular press suggests that diversified firms are more aggressive in managing earnings than non-diversified firms. We examine this claim in the seasoned equity offering (SEO) setting, where firms have been shown to have the incentive to manage earnings upwards. Using the cross-sectional modified Jones [(1991) J Accounting Res 29:193–228] model to measure discretionary current accruals, we find that discretionary current accruals are higher among diversified firms than in non-diversified ones. Our evidence is consistent with the view that the extent of firm diversification is directly related to the degree of earnings management. We further show that diversified issuers with high discretionary accruals underperformed other SEO firms.

Pricing of Seasoned Equity Offers and Earnings Management

AbstractThis study examines the relations between earnings management by firms offering seasoned equity issues and the pricing of their offers. We hypothesize that seasoned equity offering (SEO) firms that employ aggressive accounting decisions also more aggressively push up their offer prices, thereby leading to a decrease in the degree of underpricing. Consistent with our prediction (the issuer's greed hypothesis), evidence indicates that SEO firms that make opportunistic accounting decisions issue new shares at inflated prices. Our findings remain robust after controlling for other determinants of SEO underpricing and the possible endogeneity of pricing and earnings management.

Ownership structure and post-issue operating performance of firms conducting seasoned equity offerings in Thailand

This paper investigates the post-issue operating performance of companies that conducted seasoned equity offerings (SEO) in the Stock Exchange of Thailand (SET) during the period 1991 to 1994. It is documented that SEO firms exhibited declining operating performance after the offering. Further, there is a negative relation between inside ownership concentration and postissue operating performance decline. In support of the signaling effect, the ratio of issue proceeds to pre-issue equity also negatively relates to post-issue operating performance. Further, the negative relation between issue proceeds and operating performance decline is intensified among SEO firms with high insider ownership concentration. The finding offers evidence in support of agency conflicts and information asymmetry and suggests that the two factors are operating simultaneously.

Earnings management of seasoned equity offering firms in Korea

We investigated 249 Korean seasoned equity offering (SEO) firms during the period 1995–1997 to determine if the SEO firms manage earnings in the year before a planned issue of seasoned equity stocks. Using three test methods (accrual difference, correlation, and sign-change), we found that the Korean firms contemplating SEOs in the following year do manage earnings particularly when their relative performances have been poor. The results are robust irrespective of control samples. Analysis of operating performances around SEOs shows that SEO firms tend to increase reported earnings in the year immediately preceding and the year of SEOs, but no differences were found in operating cash flows between the SEO firms and the control firms. By using a regression analysis for discretionary accruals, we found that SEO firms are more likely to manage earnings if the operating performances are poor and if the offer sizes are relatively large. Association tests between stock returns and discretionary accruals indicate that the market reacts positively to net income but negatively to discretionary accruals. The results indicate that the market correctly analyzes the cash flow implications of the SEO firms' opportunistic use of discretionary accruals.

Reply to discussion of “Earnings Management of Seasoned Equity Offering Firms in Korea”

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Is the Market Optimistic about the Future Earnings of Seasoned Equity Offering Firms?

Is the Market Optimistic about the Future Earnings of Seasoned Equity Offering Firms?

The valuation of IPO and SEO firms

We examine the pricing of initial public offering (IPO) and seasoned equity offering (SEO) firms using a stochastic frontier methodology. The stochastic frontier framework models the difference between the maximum possible value of the firm and its actual market capitalization at the time of the offering as a function of observable firm characteristics. Using a new data set, we find that commonly used pricing factors do indeed influence valuation. Ceteris paribus, firms in industries with great earnings potential are more highly valued, and IPO firms are underpriced. Theories regarding underwriter reputation or windows of opportunity for equity issuance are not supported in our empirical results.

Is the Market Optimistic about the Future Earnings of Seasoned Equity Offering Firms?

The leading explanation for the post-issue long-run stock return underperformance of sea? soned equity offering firms is that investors have optimistic expectations regarding future earnings and the underperformance occurs as these expectations are corrected over time. To directly test this hypothesis, we examine investors' reaction to quarterly earnings an? nouncements over a five-year period following the offering for a large sample of seasoned equity issuing firms. In general, our evidence suggests that investors are not disappointed by earnings announcements that follow seasoned equity offerings. This result is not sen? sitive to widening the window over which earnings announcement returns are computed. This result also holds true for subsets of equity issuing firms classified as glamour issuing firms, Nasdaq listed issuing firms, and hot market issuing firms. The choice of these three subsets is predicated by extant evidence that these firms are likely to convey relatively more unfavorable information through their earnings announcements. Overall, our findings are inconsistent with the optimistic expectations hypothesis.

The Valuation of IPO and SEO Firms

We examine the pricing of initial public offering (IPO) and seasoned equity offering (SEO) firms using a stochastic frontier methodology. The stochastic frontier framework models the difference between the maximum possible value of the firm and its actual market capitalization at the time of the offering as a function of observable firm characteristics. Using a new data set, we find that commonly-used pricing factors do indeed influence valuation. Ceteris paribus, firms in industries with great earnings potential are more highly valued, and IPO firms are underpriced. Theories regarding underwriter reputation or windows of opportunity for equity issuance are not supported in our empirical results.

Is the abnormal return following equity issuances anomalous?

We examine whether a distinct equity issuer underperformance anomaly exists. In a sample of initial public offering (IPO) and seasoned equity offering (SEO) firms from 1975 to 1992, we find that underperformance is concentrated primarily in small issuing firms with low book-to-market ratios. SEO firms, that underperform these standard benchmarks have time series returns that covary with factor returns constructed from nonissuing firms. We conclude that the stock returns following equity issues reflect a more pervasive return pattern in the broader set of publicly traded companies.

The Equity in Equity Issuances

We investigate the robustness of the long-run underperformance of initial public offering (IPO) and seasoned equity offering (SEO) firms from 1975-1992. The conclusion that issuer underperformance is unique is questioned by our results. We find that underperformance is largely concentrated in the smallest issuing firms. IPO firms perform identical to nonissuing firms matched on the basis of size and book-to-market. SEO firm returns can be priced by four factor regression models indicating common covariation in SEO returns with nonissuing firms. Furthermore, SEO underperformance disappears for issuances beyond the first SEO. We find that the results are robust to purging benchmarks and factor returns of IPO and SEO firms.

The Valuation of IPO, SEO and Post-Chapter 11 Firms: A Stochastic Frontier Approach

We examine the pricing of initial public offering (IPO), seasoned equity offering (SEO) and post-Chapter 11 firms using a stochastic frontier methodolgy. The stochastic frontier framework allows us to model inefficiency or the difference between a firm's maximum predicted and its actual market capitalization at the time of the offering as a function of observable firm characteristics. Data for the analysis are comprised of 833 IPOs, 1,846 SEOs and 55 post-Chapter 11 firms between 1990 and 1996. At issue both the IPO and post-Chapter 11 firms are underpriced, while the SEO firms are almost efficiently priced. Futhermore, the market capitalization of an offering firm is positively related to size, sales and net income, negatively related to its debt level. Finally, offering firms tend to receive a poor market valuation in bad economic times.

The Operating Performance of Seasoned Equity Issuers: Free Cash Flow and Post-Issue Performance

We examine changes in operating performance for a large sample of industrial firms conducting seasoned equity offerings (SEOs). Our sample of SEO firms has significant improvements in operating performance prior to the issue. The SEO firms experience a sharp, statistically significant decrease in profitability following the SEO in both industry-adjusted and unadjusted comparisons. We find that the decline in profitability is greater for firms that have higher free cash flow, and that SEO firms that invest in new fixed assets perform better than SEO firms that do not.