The Evolution of Equity Financing: A Comparison of Dual-Class and Single-Class SEOs
Indiana University - Kelley School of Business - Department of Finance
Chad J. Zutter
University of Pittsburgh - Finance Group
William L. Megginson
University of Oklahoma; College of Industrial Management
January 8, 2008
This study compares the SEO activity of young dual- and single-class firms. Because they hold stock with superior voting rights, dual-class insiders weigh different costs and benefits when issuing equity. Most importantly, the marginal dilution of voting power resulting from an SEO is lower in dual-class firms. This suggests that dual-class firms may issue equity more frequently, or under a different set of circumstances than singles. We find dual-class firms require a significantly lower post-IPO run-up in stock price to trigger an SEO issuance than do single-class firms. Moreover, returns prior to SEO announcements are smaller for dual-class firms, suggesting that the threshold at which SEO benefits outweigh costs is lower for these firms. We interpret this finding as evidence that single-class issuers signal more severe overvaluation when they sell their own shares in an SEO compared to dual-class insiders. Overall, SEO announcement returns are similar for both firm types.
Number of Pages in PDF File: 29
Keywords: Seasoned equity offerings (SEOs), Announcement Effects, Dual class, Reduced monitoring, Governance
JEL Classification: G24, G32, G34
Date posted: January 14, 2008
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