Seasoned Equity Offerings by Small and Medium-Sized Enterprises
Laval University; Center for Interuniversity Research and Analysis on Organization (CIRANO); University of Lille II - European Center for Corporate Control Studies
Canada Pension Plan Investment Board; Caisse de Depot et Placement du Quebec (CDPQ)
Laval University; Center for Interuniversity Research and Analysis on Organization (CIRANO); European Center for Corporate Control Studies
December 23, 2009
Small Business Economics, 38 (4) 2012: 449-465
Most of the analyses of small firms’ decision to seek outside equity financing and the conditions thereof have concerned private firms. Knowledge of the risk and return of entrepreneurial ventures for outside investors is consequently limited. This paper attempts to fill this gap by examining the Canadian context, where small and medium-sized enterprises (SMEs) are allowed to list on a stock market. We analyze seasoned equity offerings launched by SMEs over the last decade. These public issuers can be considered low quality firms with poor operating performance. Managers issue equity before a large decrease in operating and stock market performance. Individual investors do not price the stocks correctly around the issue and incur significant negative returns in the years following the issue. This is particularly true for constrained issuers. We confirm that entrepreneurial outside equity attracts lemons, and that individual investors cannot invest wisely in emerging ventures. Probably as a consequence of individual investors’ lack of skill and rationality, the cost of outside equity financing of Canadian public SMEs is abnormally low.
Number of Pages in PDF File: 34
Keywords: Securities Regulation, Listing Standards, Reverse Mergers
JEL Classification: G24, G32, G14, G15Accepted Paper Series
Date posted: May 8, 2011 ; Last revised: April 13, 2012
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