Seasoned Equity Research Articles

Firms’ Choice of Seasoned Equity Issuance Method—Taking Private or Non-private Route

The choice of an issuance method for selling subsequent equity is indeed an important corporate financial decision. The recent popularity of private placements over traditional seasoned equity offering (SEO) methods motivates this review on the determinants of firms’ choice between ‘private’ and ‘non-private’ routes for follow-on equity financing. Empirical results are generally consistent with the theoretical propositions. The review suggests further empirical evidence and importance of dynamic models to extensively explain the choice of an equity floatation method by listed companies.

Skewness Preference and Seasoned Equity Offers

We find that the degree of expected idiosyncratic skewness in seasoned equity issuers’ stock returns is an important determinant of flotation costs and subsequent abnormal stock performance. High skewness issuers incur significantly greater offer price discounts, particularly when institutional share allocation is largest, pay higher gross underwriting spreads, and exhibit poorer stock performance in the three years after issuance, all compared to low skewness issuers. These results suggest that skewness-induced overpricing increases the flotation costs of seasoned equity offers and leads to poor subsequent stock performance. Received November 18, 2014; accepted December 17, 2015 by Editor Paolo Fulghieri.

Market Timing of Season Equity Offerings with Long Regulative Process

A long regulative process exists between the initial announcement and execution of seasoned equity offerings (SEOs) in China. Although the initial announcement of an SEO is associated with a significant reduction in the stock price, the regulator (China Securities Regulatory Commission) finally approves it after a significant run up in the price of the stock. Chinese managers execute SEOs after additional stock price increases. As a result, the stock price at issuance is not significantly different from the price on announcement, and is significantly higher than the price three months before the announcement. We also find stock prices decline following the execution. These results suggest regulative screenings for market stabilization are beneficial for SEO market timing, and that Chinese managers successfully time the market, even with a prolonged regulative process.

Another Welfare Effect of Insider Trading? An Empirical Analysis of Insider Trading Around Seasoned Equity Offering in Japan

While it is well known that insider trading transfers wealth from uninformed market participants to informed insiders, it is not obvious whether insider trading bring welfare effect. This paper explores an answer to this issue, employing stock trading data around SEO in Japan. An announcement of SEO usually decreases the stock price of the issuing company, creating an opportunity for insiders to sell short before the announcement and to make benefit. If this short sale before the announcement lowers the final offering price, the insider trading reduced the financing amount of the issuing company and we can say that the insider trading caused a welfare loss. The paper tests whether this prediction holds employing Japanese stock market data. The paper does not find welfare loss caused by insider trading around SEO.

Corporate Governance and the Performance of Seasoned Equity Offering Firms in Nigeria: The Mediating Effect of Agency Costs

The objective of this study is to implement Analysis of Moment Structure (AMOS) at the same time analysing the power of corporate governance on Post – Seasoned Equity Offerings (SEO’s) performance as well as in determining whether agency costs exist as a mediating variable between them. We conjecture that the mediating function of agency costs reduction is fundamental to the causal relationship between corporate governance and Post-SEO underperformance. Failure to tackle agency costs as a mediating variable may perhaps be one reason for the inconclusive findings in the allied literature. This study intends to focus on an SEO sample, for the reason that it is essential to evaluate how better corporate governance mechanisms can enhance SEO performance by estimating the relationship between different variables. To achieve this, the study will apply the approach and analyse SEOs in Nigeria from 2005-2015.

Characteristics of Norwegian Rights Issues

In this paper we study Norwegian rights issues with focus on the announcement effects of raising seasoned equity. The abnormal returns at announcement in Norway are around −8% to −10% for rights issues, and this is much higher than what is found in other countries. The average book-to-market and debt-to-assets ratios are lower for companies that issue equity with other SEO types than with rights issues. This indicates that firms using rights issues are less able to time the equity issuance than the firms that use other SEO types. In addition, the listed rights lose on average around 30% of their value during the offer period.

Credibility and Multiple SEOs: What Happens When Firms Return to the Capital Market?

Using a sample of firms that conducted multiple seasoned equity offerings (SEOs) from 1995 to 2012, we examine whether firms can build credibility for subsequent SEOs by following through on their stated use of the proceeds from earlier SEOs. We find that firms that state their intention to invest these funds in projects and those that make no such statements, but do invest have relatively more positive announcement returns around subsequent SEO announcements. Our results suggest that the markets are aware of the potential agency costs of equity, have a long memory, and update their beliefs as to the likely use of funds raised by firms.

Government Stakes as an Insurance Policy: Evidence from Seasoned Equity Offerings of Chinese Firms

ABSTRACTWhile privatization has attracted much more attention in the literature, one type of reverse privatization, a privately-controlled firm inviting government ownership as its minority shareholders, is neglected in the literature. Using large-scale census firm data from China, we investigate the determinants of this kind of reverse privatization and its impact on firm performance. We find that (1) the decision of reverse privatization by Chinese private firms is affected by local political risk, firm-level financial characteristics, and industry-level characteristics, (2) the reverse privatization significantly affects the firm’s performance, which is measured in different proxies but the effects are not consistent, and (3) moreover, we find that the benefit of reverse privatization decreases as government ownership increases. Our results suggest that the prevalence of reverse privatization in China is a political outcome, which is affected by the trade-off of political risk and political privilege. Our work suggests that political risk and political considerations are the main driving factors of privatization, or its opposite, reverse privatization. Reverse privatization, to some extent, is a rational choice in some transition economies. Our findings offer clear policy implications to the nationalization phenomenon taking place around the world recently.

Seasoned Equity Offerings and Stock Price Crashes

Using a large sample of U.S. firms during 1987-2011, we find robust evidence that the issuance of seasoned equity is associated with abnormally high future stock price crash risk. The association between seasoned equity offerings and crash risk is stronger among offerings that involve the sale of secondary shares (existing shares sold by insiders or large blockholders). We also find that recent seasoned equity issuers are far less likely to experience sudden positive price jumps relative to firms that have not recently issued equity. Our findings of elevated crash risk and diminished jump risk, when taken together, are consistent with a heightened propensity for firms to hoard bad news but not good news when issuing equity. In analyses of open market insider trading prior to crashes, we find that net selling by CEOs and CFOs is abnormally high in years succeeded by crashes relative to years not succeeded by crashes and is especially high among seasoned equity issuers that subsequently crash, which is consistent with crashes, especially those that occur after SEOs, resulting from bad news hoarding.

To Comply or Not to Comply: Understanding the Discretion in Reporting Public Float and SEC Regulations

AbstractThis paper documents how firms exercise discretion in defining affiliates and reporting public float in response to Securities and Exchange Commission regulations. I find that firms with higher expected compliance costs under section 404 of the Sarbanes‐Oxley Act of 2002 tend to classify more shares as affiliated and report lower public float. In contrast, firms issuing seasoned equity are less likely to underreport public float, possibly due to favorable regulatory treatment for large issuers. These incentives are weakened when future regulatory changes render float less important.

Investor Sentiment, Market Timing and Seasoned Equity Offering

This paper studies the impact of investor sentiment on the probability of firms conducting seasoned equity offerings (SEOs) and on stock performance around and subsequent to SEOs. We first show that investor sentiment is positively related to SEO probability, and that small, high volatility, high R&D intensity, and non-dividend-paying firms are more likely to issue SEOs. The interaction effects between investor sentiment and firms’ mispricing-related characteristics further suggest that the impact of investor sentiment on SEO probability is stronger for small and young firms. Moreover, we find that firms conducting SEOs during high sentiment periods experience less severe short-run price drops around the issuances, yet more severe post-issue long-run underperformance, compared to firms conducting SEOs during low sentiment periods. The effect of investor sentiment on stock performance is stronger for small, young, and high market-to-book ratio firms.

Financial Misstatements and Contracting in the Equity Market: Evidence from Seasoned Equity Offerings

We examine whether disclosure quality affects firms’ costs of accessing the equity capital market as well as the consequences of any such impact. We find that firms with prior financial misreporting face greater costs and difficulties in raising equity capital. Moreover, firms unable to access the equity capital market due to prior financial misreporting experience sharp declines in investment efficiency and are more likely to go bankrupt or be acquired by other companies. These results suggest that financial misrepresentation undermines the integrity of firms’ financial disclosure and increases the costs of accessing the equity market, which carry serious consequences.

Net share issues and the cross‐section of equity returns under a dividend imputation tax system

AbstractDespite considerable empirical evidence reporting a negative relationship between net share issuance and subsequent returns, it remains unresolved whether this anomaly is explained by risk or investor irrationality. This study examines the net share issuance anomaly using seasoned equity offerings before and after the introduction of an imputation tax system. We report robust evidence of a negative relationship between net share issuance and returns post‐imputation, but no relationship pre‐imputation. Our results provide evidence to support the international pervasiveness of the net share issuance anomaly, but more importantly suggest that this anomaly may be explained by risk.

Accrual Quality and Opportunistic Seasoned Equity Offering in the Korean Stock Market

We examine accrual quality (AQ) and its relationship with opportunistic seasoned equity offering (SEO) in the emerging Korean stock market. According to our empirical results, SEO firms with lower AQ tend to show higher abnormal returns around SEO announcement and significantly lower long-term performance after SEO. These results are more evident for SEO firms in which influence of institutional investors is weak. These findings suggest that poor AQ may be an important predictor of incentive for opportunistic SEOs and that the incentive may strengthen when institutional investors’ monitoring role weakens.

Do Stock-Financed Acquisitions Destroy Value? New Methods and Evidence

We contribute to the debate on whether stock-financed acquisitions destroy value for shareholders. A stock-financed acquisition is a joint takeover/equity-issue event. Using seasoned equity offering announcement returns, we estimate through linear prediction and propensity-score matching the share price drop that stock acquirers experience due to the financing choice. Net of this effect, stock-financed acquisitions are not value destructive, and the method of payment generally has no further explanatory power in the cross-section of acquirer returns. Our evidence is largely inconsistent with the agency costs of overvalued equity hypothesis.

The Signaling Effect of Durations between Equity and Debt Issues

This study examines whether durations between equity and debt offerings allow investors to identify firms that are more likely to time issues of overvalued securities. We show that firms with higher stock overpricing are more likely to quickly issue both seasoned equity and debt following the previous capital acquisition. Investors understand issuers’ incentives to quickly return to the capital market and react less favorably to equity and debt issues that follow shortly after the previous offering. Together, the results show that durations between equity and debt issues provide valuable signals to investors on whether the issuer is likely to be timing the market.

SEO announcement returns and internal capital market efficiency

We test the hypothesis that efficient internal capital markets mitigate the negative announcement returns surrounding seasoned equity offerings (SEOs). Our predictions are based on the argument that efficiency reduces uncertainty regarding the value of assets-in-place. Having established the inverse association between our efficiency measures and uncertainty, we show that the efficiency measures are positively associated with SEO announcement returns, particularly among firms with multiple segment codes. The positive relation suggests that efficiency mitigates uncertainty regarding the value of assets-in-place, and this is the channel through which more favorable announcement returns are produced in response to the SEOs of high efficiency firms.

Investor Sentiment and Stock Price Movements Surrounding Seasoned Equity Offerings

The average Chinese SEO is executed about one year after the initial announcement due to regulative screening. Although overvaluation at the announcement is not necessary for market timing, we find a significant stock price run-up and reversal surrounding SEO announcements, which are consistent with US findings. We also find stock prices are overvalued over four years preceding the announcement. These results suggest that Chinese firms announce SEOs following persistent overvaluation and additional stock price run-ups. The market price at execution is also overpriced, suggesting that market timing is an important motive for Chinese SEOs. We argue that regulative screening makes market timing difficult and accordingly Chinese managers are moderate in public seasoned equity offerings.

First-Day Stock Returns to Issuing Initial Corporate Bond and Seasoned Equity

This paper examines the intraday return of stock price in response to announcement of initial corporate debt offerings and seasoned equity offerings. We find that the average stock price reaction to initial debt offerings is positive, in comparison to an established notion that average stock price return to regular corporate debt offerings is not significantly different from zero. Moreover, firms issuing initial debt offerings with higher price/earnings ratio are found to experience more positive stock price return. Although the stock price reaction to initial debt offerings is negatively affected by the expected post-issuance long term debt ratio, the stock price return is interestingly positively correlated with the amount of debt to be issued. These findings support the theory of quality signaling by debt financing and provide evidence to the static trade-off model of capital structure. As for seasoned equity offering, we find that average stock reaction is significantly negative, which is consistent with all existing studies. Firms issuing seasoned equity offerings experience less negative stock price return if they have higher post-issuance long-term debt ratio and lower the pre-issuance liability/assets ratio relative to the industry average, which suggest that, whenever seasoned equity is issued, valuation of the firm goes down with the decrease of leverage, and market participants instead favor higher long term leverage.

Bait and Switch: How Do Chinese Firms Use Proceeds from Seasoned Equity Offerings

We reveal motivations of Chinese firms for issuing Seasoned Equity Offerings (SEO) by examining why firms change the use of SEO proceeds and how they use unspecified SEO proceeds. Using 533 SEOs issued by Chinese firms during 1999-2006, we find that firms do not use unspecified SEO proceeds on capital investment regardless of the nature of controlling shareholders. We find that if the controlling shareholder is the state, then the firm uses unspecified proceeds to stockpile cash; if the controlling shareholder is a parent state-owned enterprise, then the firm uses unspecified proceeds on retiring debt and on related party transactions.