Seasoned Equity Research Articles

Conflicting signals: A study on firms announcing share repurchases soon after seasoned equity offerings

Conflicting signals: A study on firms announcing share repurchases soon after seasoned equity offerings

Politically Affiliated Analysts

Government ownership of financial intermediaries is pervasive around the world. In this study, we examine the impact of common government ownership between the brokerage and listed firms on the information production role of brokerage firms. We show that affiliated analysts tend to issue more optimistic recommendations for stocks of firms controlled by the same government entity that controls their brokerage firms. This optimistic bias is particularly pronounced during periods of economic shocks. Our study demonstrates this by utilizing additional tariff impositions and tariff exemptions during the U.S.–China trade war as exogenous negative and positive shocks, respectively. Additionally, our study indicates that stocks recommended by politically affiliated analysts tend to underperform those recommended by independent analysts, implying that the optimism stems from conflicts of interest rather than superior information. Furthermore, our research highlights that sophisticated investors perceive the potential bias and incorporate it into their trading. Consistent with an exchange of favors story, politically affiliated brokerage firms receive a larger allocation during the issuance of local government debt, whereas governments subscribe for more shares during seasoned equity offerings by these affiliated brokerage firms. This paper was accepted by Kay Giesecke, finance. Funding: The authors gratefully acknowledge the financial support from the National Natural Science Foundation of China [Grants 71972088, 72132002, and 71991473], the National Social Science Foundation of China [Grants 21ZDA010 and 22VRC145], and the Innovation and Talent Base for Digital Technology and Finance [Grant B21038]. Supplemental Material: The online appendix and data files are available at https://doi.org/10.1287/mnsc.2022.00579 .

Mercury Systems: Debt? Equity? Cash on hand?

Research methodology This case was researched using publicly available sources, including Mercury Systems financial filings and press releases, news stories about the seasoned equity offering, financial information from Bloomberg and industry information from IBISWorld Industry Reports and articles related to seasoned/secondary equity offerings, intangible asset valuation and the use of revolving lines of credit. Quotes are taken from Mercury financial reports and press releases and express the (optimistic) opinions of company executives. Case overview/synopsis Mercury Systems, a technology company in the aerospace and defense industry, announced a six million share seasoned stock offering in June 2019. This resulted in a 6% stock price decrease. A stock price decrease is a typical event when a firm announces the issuance of new common shares, but with Mercury Systems, there were concerns about how much money the firm needed to fund its strategy of growth through acquisitions. If internally generated funds were not sufficient, should the firm issue debt or have another seasoned equity issue? Students will look at the objectives and success of the most recent seasoned equity issue, determine future funds needs and how the firm should finance these needs. Complexity academic level This case is appropriate for undergraduate and graduate students in corporate finance electives. Typically, topics such as seasoned equity offerings are not covered in introductory courses, so this is recommended for finance electives. Even in advanced finance courses, sometimes there is insufficient time to cover seasoned equity offerings.

마켓 타이밍과 유상증자

Purpose - In this study, we propose an empirical model for predicting seasoned equity offering (SEO here after) using machine learning methods. Design/methodology/approach - The models utilize the random forest method based on decision trees that considers non-linear relationships, as well as the gradient boosting tree model. SEOs incur significant direct and indirect costs. Therefore, CEOs’ decisions of seasoned equity issuances are made only when the benefits outweigh the costs, which leads to a non-linear relationship between SEOs and a determinant of them. Particularly, a variable related to market timing effectively exhibit such non-linear relations. Findings - To account for these non-linear relationships, we hypothesize that decision tree-based random forest and gradient boosting tree models are more suitable than the linear methodologies due to the non-linear relations. The results of this study support this hypothesis. Research implications or Originality - We expect that our findings can provide meaningful information to investors and policy makers by classifying companies to undergo SEOs.

Uncertain tone and SEO underpricing: Do financial constraints matter?

AbstractIn this study, we conduct several empirical tests to explore the role of financial constraints in predicting the underpricing of seasoned equity offerings (SEO underpricing) through the uncertain tone in issuing firms' filings. We show that investors can infer the firm quality or fundamental value when facing information uncertainty or value ambiguity for only firms in financially distressed groups. Our findings are consistent with prior studies using textual analysis that postulate the varying predictive power of different textual tones for the value of new seasoned equity offerings and, thus, SEO underpricing.

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.

Do Prior Financial Events to Share Repurchase Announcements Matter?

This study examines the effects of share repurchase announcements on Taiwanese firms after various financial practices and decisions from 2000 to 2020. First, we discuss whether there is a significant abnormal return on the price around share repurchase announcement. Furthermore, we explore whether firms take advantage of buyback announcements to signal the outsiders that the company’s stock price is undervalued. Second, we discuss whether the repurchase announcements have abnormal returns after financing or dividend distribution decisions as companies implement these decisions in response to future operating plans. Further, we explore whether there is a conflict between these funding operation policies and the repurchase announcement. According to our results, there is an opposing effect between seasoned equity offering and share repurchase announcements. We found the effect of the announcement of share repurchase after a cash dividend is better than a stock dividend. The results also show that the effect of a share repurchase announcement after the issuance of convertible bonds is better than an ordinary corporate bond issue, especially the firms with a low market-to-book ratio. It means that convertible bonds can reduce liabilities if the investors convert the debt into equity and improve the company’s capital structure. JEL Codes: G14, G30

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.

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.

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?

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.

Sunshine-induced mood and SEO pricing: Evidence from detailed investor bids in SEO auctions

We examine sunshine-induced mood and its impacts on investors' bidding decisions in the primary market where seasoned equities are offered. Analyzing a unique database that records seasoned equity offerings (SEOs) investors' locations, identities, and bidding information, we examine the degree to which sunshine exerts an influence on investors' bidding behaviors (and subsequently SEO discounts) from two dimensions: sunshine intensity and duration. We find that investors exposed to stronger sunshine intensity or longer sunshine duration submit a higher bid price for SEOs, thus leading to lower offer discounts. We also find that mood misattribution and risk-taking act as channels to rationalize such a sunshine effect. Our moderating analyses indicate that the documented impact strengthens in the case of greater uncertainty, less-frequent bidders, retail investors, and lower levels of investment. These sunshine effects impact failed bids, SEO participation and SEOs' long-term performance. Our study provides original evidence that investors in the primary market can be influenced by a sunshine-induced mood, which, in turn, determines the cost of equity financing.

R&D manipulation and SEO pricing in the Chinese capital market: The information effect of inefficient investment

While the literature finds that R&D management is used to inform investors, it is unclear how R&D manipulation affects pricing in security issuance because R&D management and its motives are difficult to detect. Using a group of Chinese listed companies that conducted seasoned equity offerings (SEOs) between 2007 and 2020, we examine the effect of inefficient R&D investment on SEO pricing. Our results affirm the mechanism of misleading by utilizing information asymmetry and show that under-investment in R&D drives up SEO prices, especially in firms with low profitability; over-investment in R&D would also raise SEO prices, but only for R&D-intensive industries. However, these impacts are weakened when information asymmetry is reduced. Internal investor subscription and external analyst coverage improve the information environment and suppress the information effect of inefficient R&D investment on SEO pricing.

Multinational Corporations and SEO Discounts

The fact that publicly traded companies incur substantial costs when issuing new equity has been extensively documented in the empirical finance literature. In particular, numerous studies show that seasoned equity offerings (SEOs) tend to be priced significantly below prevailing market prices, thereby causing issuers to leave money on the table. Offer price discounting is an indirect flotation cost borne by pre-SEO shareholders that, according to extant theoretical and empirical research, arises due to asymmetric information. A heretofore unrelated literature argues that corporate multinationalism, i.e., establishing operations in one or more foreign countries, exacerbates the asymmetric information problem via greater costs to shareholders of monitoring the activities and performance of foreign subsidiaries. Motivated by these lines of thought, I investigate the relation between SEO discounting and corporate multinationalism. Using a sample of SEOs completed by U.S. firms between 1998 and 2016, I show that offer price discounting is significantly higher in offerings conducted by multinational firms relative to those conducted by purely domestic firms after controlling for known determinants of SEO discounts. This effect is stronger for multinational firms with foreign subsidiaries spread across a greater number of countries and weaker for multinationals that hire a high-reputation underwriter to lead the underwriting syndicate. These findings suggest that asymmetric information costs borne by seasoned equity issuers are increasing in the geographic scope of a firm’s operations, which can be mitigated by certification from a highly reputed lead underwriter.

ESG Performance, Financial Slack, and Financial Constraints: Evidence from Seasoned Equity Offerings of Korean Firms

ESG Performance, Financial Slack, and Financial Constraints: Evidence from Seasoned Equity Offerings of Korean Firms

The impact of the pandemic policy storm on the stock price of Taiwan property insurance industry

<p>本文採用事件研究法來檢驗防疫保單之亂對產物保險業股價的影響。本文定義兩個重要事件，一為2022年4月7日疫情指揮中心首次提出「從清零走向與病毒共存」的政策宣告，二為現金增資宣告。實證結果發現從清零走向與病毒共存之宣告存在正向效果，隱含經濟活動即將復甦，投資人已提前反應並持續看好至事件發生後第四天才收斂。收斂原因係事件發生後第五天投資人明確接收到「理賠從寬認定」的訊號並反應在股價上產生顯著超常負報酬。第二現金增資宣告效果對於擁有產物保險子公司之金控公司不存在，未引起恐慌。但對於專營再保險的公司以及大股東為汽車製造業的公司而言，現金增資宣告存在負向效果，但很快收斂。本文實證結果將有助分析未來類防疫保單出現時防疫政策改變對股價的影響，及作為未來投資決策參考方向。</p> <p> </p><p>This paper uses the event study to test the impact of the pandemic policy storm on the stock price of Taiwan property insurance industry. This study defines two important events, one is the policy announcement that the Epidemic Command Center first proposed “from zero to coexist with the virus” on April 7, 2022, and the second is the announcement of seasoned equity offerings. Empirical results found that there is a positive effect from the declaration of clearing to coexistence with the virus, implying that economic activities are about to recover, and investors have reacted in advance and continued to be optimistic until the fourth day after the event. The reason for the convergence is that on the fifth day after the event, the investor clearly received the signal of "claims leniency determination" and reflected a significant abnormal negative return on the stock price. The effect of the second seasoned equity offerings announcement does not exist for the financial holding company that owns a product insurance subsidiary, which does not cause panic. However, for companies specializing in reinsurance and companies whose major shareholders are in the automobile manufacturing industry, the seasoned equity offerings announced that there is a negative effect exists, but it will soon subside. The empirical results of this paper will help analyze the impact of changes in pandemic policies on stock prices when future pandemic policies appear, and serve as a reference direction for future investment decisions.</p> <p> </p>

The Methodology Matters: What Influences Market Reaction, and Post-Issue Returns in Seasoned Equity Offerings?

Using a large database of U.S. seasoned equity offering (SEO) announcements from 2010 to 2015, we examine the effects of several explanatory variables—firm specific, macroeconomic, fixed income, and stock market variables—on the announcement period abnormal stock returns and on the longer-run post-issue abnormal returns. We use five different statistical methods—multivariate linear regression, regression on a reduced model using principal components analysis, year-by-year regression on a reduced model using principal components analysis, random forest regression on the whole sample, and year-by-year random forest regression. In general, across the methods, we find that firm’s profitability in the recent past is an important explanatory factor in both short-term and long-term abnormal stock returns, but several other significant explanatory factors change based on the statistical method used. Therefore, the statistical method used affects the results reported.

Seasoned equity offerings and payout policy

AbstractWe investigate firms that issue seasoned equity following a period of payouts to equity holders. Firms that engage in this roundtrip of equity exhibit strong growth in investment in capital expenditures. Issuing seasoned equity for payout firms does not appear to be associated with future declines in operating cash flow, but rather is associated more with large absolute increases in future cash flow. These firms tend to issue equity when their equity valuations are high, suggesting that market conditions matter. Our findings are consistent with firms issuing equity to use the capital for valuable investments in fixed assets, consistent with market assessments of growth opportunities.

Strategic Financial Management Part II: Seasoned Equity Offerings, Corporate Payout Policy, and the Case of Regulated Utilities

As discussed in the predecessor to this article that came out roughly two years ago, each of today's three dominant academic theories of capital structure has trouble explaining the financing behavior of public companies making seasoned equity offerings (SEOs) of their own stock. In conflict with the tradeoff theory, the authors' analysis of some 7,000 SEOs by U.S. industrial companies during the period 1970‐2017 finds that the vast majority, or roughly 80%, of them had the effect of moving the companies away from, rather than toward, their target leverage ratios. Inconsistent with the pecking order theory, SEO issuers have tended to be financially healthy companies with considerable unused debt capacity. And at odds with the market‐timing theory, SEOs appear to be driven more by the capital requirements associated with the large investment projects that tend to follow them than by favorable market conditions and overvalued stock prices.Nevertheless, consistent with the tradeoff theory, the authors also find that SEO issuers tend to follow their stock offerings with one or more debt offerings that have the effect of raising their leverage back toward their targets. And whereas all of the three theories are “single‐period models” suggesting some degree of shortsightedness and “opportunism” by financial managers, the authors' findings present a picture of long‐run‐value‐maximizing strategic management of corporate capital structures—one that takes account of the company's current leverage in relation to its longer‐run target, investment opportunities, and long‐term capital requirements, and the costs and benefits associated with alternative sequences of financing transactions.Building on their earlier article, the authors extend their analysis to examine the payout and well as leverage and investment decisions of SEO issuers—and expand their sample of some 7,000 industrial issuers to include another 1,500 SEOs by regulated utilities. In the wake of the SEOs, both dividends and repurchases tend to increase; but the payout rates for utilities were almost eight times higher than for industrials, and overwhelmingly take the form of dividends rather than buybacks.In the final sections of the article, the authors first attempt to explain the negative stock price reactions to the announcements of SEOs, and then speculate about the causes of the even more negative, and puzzling, long‐run stock returns to industrial, but not utility, SEO issuers.