Seasoned Equity Research Articles

The Effects of Ownership Structure on Payout Policy: Evidence from Seasoned Equity Offerings (Seos)

This paper examines the effects of ownership structure on dividend payout policy, especially the role of controlling shareholders in shaping firm’s payout policy in a sample of firms that pay dividends and issue new equity simultaneously. The results show that managers in weak governed firms are more likely to initiate custom-made dividends to meet large shareholders’ needs while using costly new equity to finance new investment projects. This paper contributes to the existing literature on agency problems by providing an explanation of why firms engage in suboptimal payout policy by paying dividends and issuing equity simultaneously. Specifically, large shareholders may expropriate small shareholders by compelling the entrenched managers to pay custom made dividends while issuing new equity at the same time

Economic and capital market antecedents of venture capital commitments (1960–2010)

Using vector autoregression technique, we examine the interrelation between venture capital flows, economic development, capital market fund-raising activities, and capital market valuation, based on annual data of the United States over the past half-century. We find that venture capital commitments appear to be correlated with GDP and capital market valuation. While capital market fund-raising activities (Initial Public Offerings and Seasoned Equity Offerings) are also correlated with venture capital flows, these effects are subsumed by GDP, indicating that the overall economy drives both venture capital flows and capital market financing activities. Analyses from impulse response functions suggest that shocks to GDP have a permanent effect on venture capital flows, while the impact of capital market valuation (Standard & Poor 500 returns) on venture capital flows is rather short lived. Overall, both economy-wide development and financial market fluctuations seem to impact venture capital flows.

The Impact of the 2005 Securities Offering Reform on Voluntary Disclosure Before Seasoned Equity Offerings

In 2005, the SEC enacted the Securities Offering Reform (Reform), which relaxes ‘gun jumping’ restrictions, thereby allowing firms to more freely disclose information before equity offerings. We examine the effect of the Reform on voluntary disclosure behavior before equity offerings and the associated economic consequences. We find that firms provide significantly more pre-offering disclosures after the Reform. Further, we find that these pre-offering disclosures are associated with a decrease in information asymmetry and a reduction in the cost of raising equity capital. Our findings not only inform the debate on the market effect of the Reform, but also speak to the literature on the relation between voluntary disclosure and information asymmetry by examining the effect of quasi-exogenous changes in voluntary disclosure on information asymmetry, and thus a firm’s cost of capital.

Does Changing Leverage Cause Miss-Specification of Long-Run Return Measures in Seasoned Equity Offerings?

We investigate the “new equity puzzle” using an approach that allows us to analyze the structural change in both alpha and systematic risk after the event. Brav, Geczy, and Gompers (2000) and Eckbo, Masulis, and Nodi (2000) cast doubt on the validity of matched-firm adjusted returns as a measure of post-issue performance. Eckbo et al. (2000) argue that the drop in the leverage of SEO issuers reduces their risk level and may explain their lower post-issue returns compared to their matchers. Using a sample of 3,949 SEO issues between 1985 and 2005, we find that after taking into account the change in their risk profile, SEO firms still exhibit a clear post-issue underperformance over their matchers at short or long run and regardless the level of change in their leverage. Furthermore, we find that SEO firms with the largest decline in leverage, exhibit a larger performance drop over their matchers compared to firms with the largest increase in leverage. However, over the 1 and 3 years post-issue, these SEO firms with the largest decline in leverage, show a lower underperformance over their matchers compared to firms with the largest increase in leverage. On the longer run - over the 5-year period particularly - the picture reverses.

Accelerated Seasoned Equity Offerings: Motives and Issuer-Underwriter Interactions

We examine interactions between firms issuing seasoned equity and their underwriters. Our approach contrasts with many studies which assume the interests of issuing firms and their underwriters are aligned, thus rendering distinctions between the two parties unimportant. We specifically examine interactions between issuers and underwriters to a) characterize the interactions; b) investigate how such interactions affect the stock issue; and c) see what interactions suggest about motives for issue. We examine the form of seasoned equity offering (SEO) that is now most prevalent in the US, Canada and Europe: accelerated SEOs. In particular, we look at Canadian bought deal SEOs - the original accelerated offering which is thus the most established. We use multiple empirical techniques: we survey both underwriters and CFOs of issuing firms (92 responses in total) and we also use secondary data to see if it corroborates their responses. There are three main findings. First, we find underwriters play a much more significant role than has been empirically documented. Underwriters are instrumental in initiating issues, as well as determining the terms of the underwriting contract. Second, we provide empirical support for the Efficient Contracting Hypothesis which says that few terms of the underwriting contract are negotiated. Finally, we show that speed of issue is the key consideration of issuers, consistent with both the market timing and financial constraint motives for SEOs, but that other evidence for these motives is unconvincing. Instead we find evidence consistent with underwriter profit goals motivating issues. This finding of the importance of underwriter goals supports our intuition that it is important not to conflate the interests of the two parties to the underwriting contract.

Are seasoned equity offerings made in response to weak operating performance?

This article examines the operating performance of firms surrounding Seasoned Equity Offerings (SEOs) and finds that weak operating performance by issuing firms begins during a 2-year period prior to issue. This is in contrast to the stylized facts that a seasoned equity issue initiates a period of weak performance. Our findings suggest instead that an issue is more likely a reaction to a period of weak performance that is already well under way. Consistent with previous studies, we find that weak performance continues after the issue despite the evidence of favourable macroeconomic conditions.

Registered Insider Sales and Long-Run Performance of New Security Issues

This paper investigates the information content of registered insider sales in the Seasoned Equity Offering (SEO) process from 1997-2009. We find that initial market reactions and long-run post-issue stock performance are negatively related to C-level executive insider sales, but unrelated to participation by non-executive insiders. We also find significantly lower post-issue abnormal earnings surprises for SEOs with C-level executive sales. Overall, the findings are consistent with the predictions of asymmetric information and agency theories.

Corporate Governance and Investor Confidence in Seasoned Equity Offerings

We investigate how governance affects investor confidence in seasoned equity offerings (SEOs) and the cost of raising external equity. Using a differences-in-differences approach with business combination statutes as an external shock, we find investors become worried about non-productive use of SEO proceeds when the law change weakens external pressure for good governance. We buttress this finding by identifying a channel through which governance causes heterogeneous investor reaction to SEO announcements--increases in capital expenditures following SEOs. Also consistent with the governance based explanation, market reaction is more negative when issuers have prior records of value-reducing acquisitions and weaker alignment of managerial incentives to shareholder value. The magnitudes of these impacts are surprisingly large, explaining most of negative market reactions to primary offerings. Secondary offerings are met with strong negative reactions due to signaling effects; however, our data show no evidence in support of the adverse selection hypothesis.

Firm Characteristics And Seasoned Equity Issuance Method: Private Placement Versus Public Offering

<p class="MsoNormal" style="text-align: justify; margin: 0in 0.5in 0pt;"><span style="mso-bidi-font-style: italic;"><span style="font-size: x-small;"><span style="font-family: Batang;">This study compares characteristics of firms using the private placement method of issuing common stock with those using the public offering method.<span style="mso-spacerun: yes;">  </span>Results show that private placement firms are smaller in size, have more growth opportunities, and have less financial slack than public offering firms.<span style="mso-spacerun: yes;">  </span>Their issuance decisions are likely to be driven by their needs for external capital, rather than motivated by overvaluation of their stocks.<span style="mso-spacerun: yes;">  </span>These findings are consistent with the information hypothesis, which states that undervalued firms with favorable prospects and little financial slack use the private placement method to resolve the information asymmetry problem when seeking external equity capital.<span style="mso-spacerun: yes;">  </span></span></span></span></p>

Rational Financial Management: Evidence from Seasoned Equity Offerings

Current theories of capital structure have difficulty explaining the aspects of financing behavior we document. In contrast to the tradeoff theory, seasoned equity offers frequently move firms away from their target leverage ratios. At odds with the pecking-order theory, SEO firms typically are financially healthy companies with low leverage, unused debt capacity and substantial cash balances. Inconsistent with the market-timing theory, SEOs appear to be driven by capital requirements associated with large investment projects rather than by market-timing considerations. Moreover, firms issue debt following SEOs, not only to finance investment, but to increase leverage toward its target level. Each of these theories assumes some degree of myopia among financial managers. We propose that CFOs manage their capital structures rationally rather than myopically. They consider the firm’s current and target leverage, investment opportunities and long-term capital requirements, as well as the costs and benefits of alternative sequences of financing transactions. This framework, which we term rational financial management, better explains the financing and leverage behavior of SEO firms.

Can a stock exchange improve corporate behavior? Evidence from firms' migration to premium listings in Brazil

Because Brazil's legal system lacked protection for minority shareholders and trading of Brazilian shares flowed to U.S. exchanges, in 2001 the São Paulo Stock Exchange, Bovespa, created three premium exchange listings that require more stringent shareholder protections. This paper examines the effects of a commitment to improved corporate disclosure and governance by firms' voluntary migration to these premium listings. Our analysis finds that a firm's migration brings positive abnormal returns to its shareholders, particularly when its shares did not have a prior cross-listing on a U.S. exchange and also when the firm chooses a premium listing with the highest standards. Migration to a premium listing also leads to a significant increase in the trading volume of non-voting shares. Firms that choose a premium listing tend to have growth opportunities that they finance with subsequent seasoned equity offerings. These results suggest that a premium listing is a mechanism for bonding to improved corporate behavior that can be less costly than cross-listing on a U.S. exchange.

Liquidity Management Around Seasoned Equity Offerings

Liquidity Management Around Seasoned Equity Offerings

Do Short Sellers Detect Mispricing Prior to Seasoned Equity Offers?

Do Short Sellers Detect Mispricing Prior to Seasoned Equity Offers?

Downward-sloping Demand Curves or Price Pressure Effects? New Evidence from Japanese Seasoned Equity Issues

Downward-sloping Demand Curves or Price Pressure Effects? New Evidence from Japanese Seasoned Equity Issues

Accounting Flexibility and Managers’ Forecast Behavior Prior to Seasoned Equity Offerings

This study examines the effect of accounting flexibility on managers’ forecasting behavior prior to seasoned equity offerings (SEOs). Although SEO firms have a strong incentive to convey optimistic information to boost the pre-SEO stock price, they also face enhanced litigation risk arising from SEO-related regulations. Thus, I hypothesize that managers will release positive news through their forecasts (relative to the prevailing analyst consensus) prior to an SEO only if they have the accounting flexibility to manage subsequent reported earnings to meet or exceed their forecasts. I find that managers with greater accounting flexibility are more likely to issue a forecast prior to the SEO and that their forecasts are more likely to convey positive news and are more specific. Furthermore, I find no effect of accounting flexibility for non-SEO control firms or for non-SEO periods. My results suggest that when managers experience a tension between the incentive for voluntary disclosure and high litigation risk, accounting flexibility is an important factor that determines their forecasting behavior.

Advertising, Brand Capital, and Asset Returns

We provide a theoretical and empirical analysis of the link between advertising expenditures, brand capital, and asset returns in the cross-section of U.S. publicly traded firms. Interpreting advertising expenditures as firms' investment in brand capital, we document that: (i) firms with high brand capital investment rates underperform firms with low brand capital investment rates by 7% per annum; and (ii) brand capital intensive firms outperform low brand capital intensive firms by 4.1% per annum. Based on standard Q-theory of investment, we develop a structural dynamic investment-based model in which advertising expenditures and firm's risk are both jointly and endogenously determined. The model replicates the empirical asset pricing facts reasonably well. In addition, the model is consistent with the time-series properties of brand capital and physical capital investment rates, as well as with the unusually high advertising expenditures during seasoned equity offerings. Taken together, our results suggest that standard Q-theory of investment provides a useful framework for understanding the dynamics of advertising expenditures by corporations.

How Do Financial Constraints Relate to Financial Reporting Quality? Evidence from Seasoned Equity Offerings

How Do Financial Constraints Relate to Financial Reporting Quality? Evidence from Seasoned Equity Offerings

Management Quality and Equity Issue Characteristics: A Comparison of SEOs and IPOs

We use hand‐collected data on the management quality of firms making seasoned equity offerings (SEOs) or initial public offerings (IPOs) to analyze the relationship between management quality and equity issue characteristics, and to compare the effect of management quality on SEOs versus IPOs. We hypothesize that higher quality managers are more credible to equity market investors, thereby reducing the information asymmetry they face in the market and outsiders’ information production costs. Therefore, the equity issues of higher management quality firms will have more reputable underwriters, smaller underwriting spreads, and other expenses, and smaller SEO discounts. Further, since better managers will be able to select better projects, higher management quality firms will have larger offer sizes. Finally, since SEO firms are likely to suffer from less information asymmetry compared to IPO firms, these effects will be smaller for SEOs than for IPOs. Our findings support the above hypotheses. Our direct tests of the relationship between management quality and information asymmetry, and our comparison of information asymmetry in SEOs versus IPOs provide further support for these hypotheses.

An analysis of Japanese earnings forecast revisions with application to seasoned equity offerings

Using the bootstrap method, we explore the characteristics of revisions in Japanese earnings forecast data. We find that forecast revisions exhibit a downward trend over time as the actual earnings announcement date approaches, and are serially correlated with three significant lags. Using these characteristics we develop a model to estimate abnormal forecast revisions, and illustrate the model's use with a sample of Japanese companies announcing seasoned equity offerings (SEOs). In contrast to results obtained by studies using American data, our findings indicate significant positive upward revisions when Japanese firms announce an SEO.

Capital structures in an emerging market: a duration analysis of the time interval between IPO and SEO in China

We model the durations between firms’ ‘Initial Public Offerings’ (IPOs) and their subsequent ‘Seasoned Equity Offerings’ (SEOs) in China between 2001 and 2006. Our results have important implications for the capital structure in emerging markets. Our evidence on financing decisions in China contradicts the predictions of both the trade-off and pecking order theories. Firms do not issue equity after debt financing to offset the deviation from the target leverage ratio. Profitability is negatively related to debt ratios. Limited access to the corporate bond market and the privilege of the low effective tax rate that local governments give to firms have increased the cost of debt and decreased the benefit of debt, and make firms in China under-utilize the tax shield of debt. Surprisingly, profitability is positively related to the conditional probability of equity financing, and market timing is an important consideration when Chinese firms undertake equity financing.