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The Evolution of Equity Financing: A Comparison of Dual-Class and Single-Class SEOs

29 Pages Posted: 14 Jan 2008  

Scott Smart

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

Date Written: January 8, 2008

Abstract

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.

Keywords: Seasoned equity offerings (SEOs), Announcement Effects, Dual class, Reduced monitoring, Governance

JEL Classification: G24, G32, G34

Suggested Citation

Smart, Scott and Zutter, Chad J. and Megginson, William L., The Evolution of Equity Financing: A Comparison of Dual-Class and Single-Class SEOs (January 8, 2008). Available at SSRN: https://ssrn.com/abstract=1081765 or http://dx.doi.org/10.2139/ssrn.1081765

Scott B. Smart

Indiana University - Kelley School of Business - Department of Finance ( email )

1309 E. 10th St.
Kelley School of Business
Bloomington, IN 47405
United States
812-855-3401 (Phone)
812-855-5875 (Fax)

Chad J. Zutter

University of Pittsburgh - Finance Group ( email )

352 Mervis Hall, Katz GSOB
University of Pittsburgh
Pittsburgh, PA 15260
United States
412-648-2159 (Phone)
412-648-1693 (Fax)

HOME PAGE: http://www.pitt.edu/~czutter/

William L. Megginson (Contact Author)

University of Oklahoma ( email )

307 W Brooks, 205A Adams Hall
Norman, OK 73019
United States
(405) 325-2058 (Phone)
(405) 325-1957 (Fax)

HOME PAGE: http://faculty-staff.ou.edu/M/William.L.Megginson-

College of Industrial Management ( email )

Dhahran, 31261
Saudi Arabia

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