Seasoned Equity Offerings, Corporate Governance, and Investments

Abstract

We find weak governance is a primary reason investors react negatively to the announcement of seasoned equity offerings (SEOs). Using a difference-in-differences approach, we find investors worry about non-productive use of SEO proceeds when external pressure for good governance lifts due to an external shock. Investors react negatively only when treated firms raise funds to increase capital investments. Market reaction is more negative when issuers have prior records of value-reducing acquisitions and weaker managerial wealth sensitivity to shareholder value. The magnitudes of these governance effects are surprisingly large, explaining most of the previously documented negative market reactions to primary SEOs.

Keywords: Governance, Equity Issuance, Business Combination Statutes, Managerial Incentives, Signaling, Adverse Selection Problem

JEL Classification: G32, G34