SEO Risk Dynamics

Abstract:     
This paper investigates the dynamics of firm level beta and volatility around seasoned equity offerings. Beta increases prior to the SEO and decreases thereafter. This pattern is generally consistent with a real options explanation of SEO underperformance, but existing models predict a sharp risk drop, while we find a gradual decline. To reconcile this difference, we extend the theory to consider investment commitment and internal financing. In the cross-section, we show that firms with high prior return runups experience larger post-issuance underperformance, as well as more substantial post-issuance declines in beta. By contrast, large market-wide runups, which might be taken as a measure of sentiment, do not precede either postissuance underperformance or post-issuance beta declines. Finally, equity issues coincide with low points in both own firm and market-wide volatility, suggesting the possibility of volatility timing in corporate financing activities.

Number of Pages in PDF File: 48

Keywords: Seasoned Equity Offering, Real Options, Dynamic Risk, Dynamic Beta, Investment Commitment, Time-to-Build, Long Run Event Studies, Abnormal Return

JEL Classification: G31, G32

Accepted Paper Series