Three essays on seasoned equity offerings

Yueh-Fang Ho

doi:10.17918/etd-251

This study focuses on three related aspects of seasoned equity offerings (SEOs) that together cast light on the relation between the market reaction to an SEO announcement and post-offering performance. Considering mediocre post-offering performance, the first essay addresses the question: Do investors learn from previous offerings in evaluating subsequent offerings? The second essay is motivated by previous studies showing that post-offering performance is linked to earnings management for primary SEOs. We examine whether earnings management extends to secondary and combination SEOs. Finally, although dilution is unrelated to market reaction to an SEO announcement, the third essay explores whether post-offering performance is related to dilution effects. In the first essay, learning by investors would produce a positive relation between the market reaction to the announcement and the operating and stock price performance following a previous SEO. The findings suggest that firms can offer multiple SEOs until their post-offering performance disappoints investors. However, the market reaction to an announcement depends more on the firms' condition at the time of the announcement rather than its performance after a previous announcement. The second essay examines whether earnings management observed prior to primary SEOs extends to secondary and combination SEOs. In primary offerings, all previous shareholders benefit from selling stock to new shareholders at a higher price, whereas the benefits of earnings management accrue solely to a smaller group of selling shareholders in a secondary offering. Because of greater convergence of interests in primary and combination SEOs, we hypothesize greater earnings management for primary SEOs than for secondary SEOs. Results show that firms manage earnings upward more for primary SEOs and combination SEOs than for secondary SEOs. Thethird essay explores the linkage between dilution and post-offering performance. We hypothesize that primary SEOs will exhibit greater post-offering negative earnings surprise than secondary SEOs. We find a significant and negative earnings surprise following primary SEOs, but not following secondary SEOs. There is also a positive relation between the negative earnings surprise and dilution effect.

Three essays on seasoned equity offerings

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Three essays on seasoned equity offerings

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