Seasoned Equity Offerings, Market Timing, and the Corporate Lifecycle

Fisher College of Business Working Paper No. 2007-03-014

Charles A. Dice Working Paper No. 2007-13

48 Pages Posted: 21 Jul 2007 Last revised: 27 Sep 2010

See all articles by Harry DeAngelo

Harry DeAngelo

University of Southern California - Marshall School of Business - Finance and Business Economics Department

Linda DeAngelo

University of Southern California - Marshall School of Business - Finance and Business Economics Department

René M. Stulz

Ohio State University (OSU) - Department of Finance; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI)

Multiple version iconThere are 2 versions of this paper

Date Written: April 2009

Abstract

This paper gauges the importance of market timing for the decision to conduct a seasoned equity offering by testing whether SEO decisions are better explained by timing opportunities or by a simple fundamentals-based theory in which firms sell stock primarily in the early stages of their lifecycle, when growth opportunities exceed internally generated cash flow. We measure timing opportunities using market-to-book ratios and prior and future stock returns (and other equity mispricing proxies advanced in the literature), and lifecycle stage by the number of years listed. Both timing and lifecycle proxies have a significant influence, with the lifecycle effect quantitatively stronger, but neither adequately explains SEO decisions because (i) a near-majority of issuers are not growth firms, and (ii) the vast majority of firms with high M/B ratios and high recent and poor future stock returns fail to issue stock. Since a full 62.6% of issuers would run out of cash by the year after the SEO without the offer proceeds (and 81.1% would have subnormal cash balances at that time), we conclude that a near-term cash need is the primary SEO motive, with market-timing opportunities and lifecycle stage exerting economically significant ancillary influences on the SEO decision.

Keywords: market timing, SEO, equity financing, cash balances, corporate lifecycle

JEL Classification: G32, G31, G35

Suggested Citation

DeAngelo, Harry and DeAngelo, Linda and Stulz, Rene M., Seasoned Equity Offerings, Market Timing, and the Corporate Lifecycle (April 2009). Fisher College of Business Working Paper No. 2007-03-014; Charles A. Dice Working Paper No. 2007-13. Available at SSRN: https://ssrn.com/abstract=1000441 or http://dx.doi.org/10.2139/ssrn.1000441

Harry DeAngelo (Contact Author)

University of Southern California - Marshall School of Business - Finance and Business Economics Department ( email )

Marshall School of Business
Los Angeles, CA 90089
United States
213-740-6541 (Phone)
213-740-6650 (Fax)

Linda DeAngelo

University of Southern California - Marshall School of Business - Finance and Business Economics Department ( email )

Marshall School of Business
Los Angeles, CA 90089
United States
213-740-3868 (Phone)
213-740-6650 (Fax)

Rene M. Stulz

Ohio State University (OSU) - Department of Finance ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States

HOME PAGE: http://www.cob.ohio-state.edu/fin/faculty/stulz

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

European Corporate Governance Institute (ECGI)

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

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