Seasoned Equity Research Articles

Why Do Investors React Negatively to Seasoned Equity Offerings?

The average investor reaction is neutral to primary offerings by firms with managerial incentives closely tied to the shareholder value. Investors react negatively (1) when there are insufficient managerial ownership stakes to deter misuse of SEO proceeds and (2) when there are negative signals transmitted through secondary offerings by insiders and block-holders. Consistent with an agency-based explanation, firms engaging in value-destroying corporate acquisitions suffer large negative returns at the announcement of SEOs. Agency problems seem to be of less concern to investors, however, when firms are subject to intense monitoring by institutional investors and the market for corporate control. Overall, our findings demonstrate that controlling agency problems, an important facet of corporate governance, has a significant effect on firm valuation and the cost of external equity capital.

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.

Industry Screening: Evidence from Seasoned Equity Offerings

Investors may rely on industries to judge the quality of seasoned equity Offerings. In this paper, we propose an industry screening hypothesis where poorer industrial growth prospects deter lower-quality firms from issuing equity. We expect issuer quality to be negatively associated with industry growth opportunities. Our empirical evidence shows that low-growth industry issuers outperform those from high-growth industries in their announcement period cumulative abnormal returns and post-issue operating performance. These results are robust against alternative explanations. We interpret these findings as evidence for the existence of the industry screening eect.

Liquidity, Volatility and Stock Price Adjustment: Evidence from Seasoned Equity Offerings in an Emerging Market

Using data from the Taiwanese stock market, an emerging market, this paper documents positive changes in liquidity and volatility around seasoned equity offerings (SEOs). These findings are consistent with the uncertain signal hypothesis that investors with diverse views on the information content of SEOs are likely to induce larger trading activity and subsequent higher stock return volatility. We also provide direct evidence that changes in liquidity is positively associated with stock price adjustment. However, the relations among liquidity, volatility and price movements appear to rely on how SEOs are conducted. A practical implication is that managers may influence liquidity and stock price movement through their choice of SEOs issuing methods.

Credit Rating and Underpricing of Seasoned Equity Offerings

This paper examines how firm credit rating affects SEO underpricing and announcement-period abnormal stock returns. We find that firms with credit ratings have less SEO underpricing than firms without credit ratings. We also find that firms with high credit ratings have less SEO underpricing and smaller announcement-period abnormal stock returns than firms with low credit ratings. These results suggest that the existence of credit ratings reduces information asymmetry and the level of credit ratings indicates the degree of wealth transfer from shareholders to bondholders in SEOs.

Audit quality and earnings management by seasoned equity offering firms

We investigate the relationship between audit quality as measured by audit firm size and industry specialisation, and earnings management as measured by discretionary current accruals, for companies making seasoned equity offerings (SEOs). Earnings management in the SEO process is of concern because of the underperformance of seasoned equity offering firms. We find evidence that Big 5 auditors are associated with lower earnings management in the years before, during, and subsequent to the SEO. Industry specialist auditors are associated with lower earnings management only in the year of the SEO. Our study contributes to the literature by demonstrating that audit quality reduces earnings management by SEO companies, and that industry specialisation, as a measure of audit quality, also constrains 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.

The pricing of global versus domestic seasoned equity offers

This study investigates the pricing behavior of global seasoned equity offers by US industrial companies. We find that, though the offer price is set substantially below the last trade price for both global and domestic offers, global offers experience significantly lower offer price discounts. Global offers also suffer smaller price declines during the entire offering interval that starts from 1 day prior to filing and ends 1 day after the offer. These results are consistent with the notion that demand for securities is not perfectly elastic and hence allocating a sizeable portion of total shares to overseas investors relieves the price pressure exerted in the domestic market, leading to a higher equilibrium price.

The Puzzling Increase in the Underpricing of Seasoned Equity Offerings

AbstractUsing a sample of over 3,000 seasoned equity offerings (SEOs) from 1983 to 1998, we test the hypothesis that the U.S. Securities and Exchange Commission's Rule 10b‐21, which disallows the covering of short positions with newly issued SEOs, makes pre‐offer stock prices less informative, which, in turn, causes the new seasoned equity to be priced at a discount. Consistent with the hypothesis, we find that the year the rule went into effect coincides with the year from which we begin observing significant SEO discounts. Further, we find that ex ante uncertainty and SEO discounts are positively related. We also conduct tests specifically related to short selling, and we also consider an exhaustive set of alternative explanations for the discounts. Based on all of the evidence, we conclude that it is the rule that makes issue discounts larger in the 1990s.

The Cost of Raising Capital - New Evidence from Seasoned Equity Offerings in Switzerland

This paper is focused on the cost of raising equity capital in Switzerland. In the spirit of the papers of Altinkilic and Hansen (2000) and Buehner and Kaserer (2002) we analyze the structure of the flotation cost function for listed firms in Switzerland. For a sample of 45 SEOs on the Swiss capital market over the years 1996-2000 it is found that the direct flotation cost spreads averages 4.26 percent of gross proceeds. Compared with results related to the German or French capital market this figure is surprisingly high. Moreover, we develop empirically a flotation cost function. On the basis of this analysis it turns out that flotation costs are lower if the issuer opts for self-registration, the issue is less complex, the offer price discount is higher and the stock's market risk is lower. As far as the economies of scale view is concerned, we find clear evidence in favor of diseconomies of scale. In fact, marginal flotation costs are weakly increasing in gross proceeds and, moreover, no supporting evidence for the existence of a fixed cost component in flotation costs can be found. To our understanding this is an important additional piece of evidence against the conventional wisdom that underwriting technology is governed by economies of scale.

A Re-Examination of Price Pressure Around Seasoned Equity Offerings

This study investigates the presence of temporary price pressure effects around the offer date of SEOs. SEOs experience significant negative abnormal returns immediately prior to the offer date and significant positive abnormal returns immediately following the offer date. Temporary price pressure can explain much of these returns, as evidenced by: (i) pre-offer returns are related to several characteristics associated with price pressure, and (ii) there is an inverse relation between pre- and post-offer returns. Using an instrumental variables approach, I find that a large portion of the pre-offer abnormal returns reverse during the few trading days after the offer.

Long-run performance of Spanish seasoned equity issues with rights

This paper analyzes the long-run effect on shareholders' wealth and firms' operating performance of the right offering decision in Spain. The evidence shows that the stock price of firms' issuing rights substantially underperform the different benchmarks employed. It has also been observed that these companies experience a decrease in accounting profitability for some pre- to postissue periods. An excessive optimism about the long-term prospects of equity issuers could explain these results.

Discounting and Clustering in Seasoned Equity Offering Prices

AbstractAn analysis of 4,814 SEOs during 1986–1999 indicates that the average offering ofnew shares is priced at a discount of 3% from the closing price on the day before the issue. Discounts have risen steadily over time, sharply increasing the indirect costs of issuing seasoned equity. There is evidence of increased clustering of offer prices at integers, and of greater importance in the analyst coverage provided by underwriters. Adjusting for other factors, we find that issues with integer offer prices, and underwriters with highly regarded analysts, are increasingly associated with larger discounts. The rise in discounts is consistent with an increased ability of investment bankers to extract rents from issuing firms.

Corporate Decisions, Information and Prices: Do Managers Move Prices or Do Prices Move Managers?

Seasoned equity offerings involve two significant events: registration followed by the decision to complete the issue or withdraw the registration. We present an empirical analysis of the interaction between seasoned equity issues, insider trading and the incorporation of information in prices around these two events. We find that the manager moves prices through corporate decisions but not personal ones. Specifically, the market reacts to the registration and the registration triggers information acquisition by the market, which is shown to influence the manager's final decision. Trading by managers during this interval does not, however, move prices. (J.E.L.: G14, G23, G32).

Does Stock Market Liquidity Matter? Evidence from Seasoned Equity Offerings

This paper presents empirical evidence that stock market liquidity is an important determinant of the cost of raising external capital. Because the role of an investment banking syndicate in a public security offering is analogous to that of a block trader, investment banks should charge lower fees to firms with more liquid securities. Using a large sample of seasoned equity offerings, we find that, ceteris paribus, investment banks' fees are significantly lower for firms with more liquid stock. We estimate that the difference in the investment banking fee for firms in the most liquid quintile versus the least liquid quintile, controlling for other factors, is approximately 107 basis points, which represents about 22.3 percent of the average investment banking fee in our sample. Our findings suggest that firms have an incentive to promote the market liquidity of their equity.

Valuation effects of domestic and international seasoned equity offerings by Canadian cross-listed firms

This paper finds significant differences in the price impacts around the announcement date for domestic and international seasoned equity offerings (SEOs) by Canadian issuers cross-listed on US trade venues. Important determinants that differ by US cross-listing trade venue are identified for the price impacts associated with domestic and international SEOs. The significant determinants are variables that proxy for positive private and public firm information for the domestic SEOs of issuers cross-listed on NASDAQ, and are mainly variables that proxy for negative private information for the domestic SEOs of issuers cross-listed on the NYSE/AMEX. Good and bad news affect domestic and international SEOs favorably and unfavorably, respectively. The only common determinant for the domestic and international SEOs and for domestic SEOs for both groupings of US listing venues is whether or not the issue is primary.

Smart investments by smart money: Evidence from seasoned equity offerings

We document that seasoned equity issuers experiencing the greatest increase in institutional investment around the offer date outperformed their benchmark portfolios in the year following the issue by a statistically and economically significant margin relative to those experiencing the greatest decrease. No such relationship exists for a control sample of matched non-issuers. Issuers with the greatest institutional investment are also found to have the highest ratio of sell-side analyst upgrades less downgrades to total forecasts in the two quarters following the issue. Again, no such relationship is found for matched non-issuers. We interpret our results as evidence that institutions are able to identify above-average seasoned equity offering SEO firms at the time of equity issuance and increase their holdings in these potential outperformers.

The Structure of Executive Compensation and Seasoned Equity Offering Announcements

The decision to announce a seasoned equity offering typically comes with a decline in firm value, as investors interpret this decision as a signal of poor financial health. This bad news signal is extenuated when investors are aware that managers' personal wealth is tied to that of the firm's performance. In this paper, we analyze the short-term and long-term market reaction to SEO announcements and the executives' link to firm value. The extent to which executive's personal wealth is tied to that of firm value is measured by the proportion of CEO equity-based compensation. Results support the hypothesis that as the proportion of CEO equity-based compensation increases, so does the credibility of the signal and the strength of the negative reaction to the announcement of SEOs.

The Determinants of Insiders' Selling at Initial Public Offerings: An Empirical Analysis

The paper examines the effect of information asymmetry on equity selling by pre-IPO shareholders as part of the offering. Consistent with the implications of models that use equity retention as a signaling mechanism, the magnitude of selling is positively related to the firm age, size and the underwriter's reputation. In addition, insiders that are more likely to possess private information about the firm prospects sell almost no shares at the offer itself but often use the over-allotment option as a second stage mechanism for selling equity. However, the cross sectional variation in sales of secondary shares is primarily affected by the magnitude of the price revision during the road show and by the likelihood the firm would conduct a seasoned equity offering soon after the IPO.

Underwriter Certification and Japanese Seasoned Equity Issues

In sharp contrast to results in the United States, the average stock price response to an announcement of a seasoned equity issue in Japan is positive. Offer prices in Japan, unlike the United States, are announced several days before the beginning of the subscription period and incorporate a substantial discount. We suggest that the positive announcement effects in Japan are consistent with the underwriter's certification of the issuing firm's value. We characterize the underwriter's risk as a put option and find a positive association between the underwriter's risk and the announcement returns, as well as other results consistent with underwriter certification. Copyright 2003, Oxford University Press.