Examining Bank SEOs: Are Offers Made by Undercapitalized Banks Different?

46 Pages Posted: 12 Feb 2009

See all articles by O. Emre Ergungor

O. Emre Ergungor

affiliation not provided to SSRN

C. N. V. Krishnan

Case Western Reserve University - Department of Banking & Finance

Paul A. Laux

University of Delaware - Alfred Lerner College of Business and Economics

Ajai K. Singh

Department of Finance, University of Central Florida

Allan A. Zebedee

Clarkson University

Date Written: January 14, 2009

Abstract

Despite extensive monitoring, banking operations are often considered opaque, and despite explicit capital adequacy regulation, banks may have substantial discretion in their financing. Both monitoring and capital regulation have changed substantially over time, with the adoption of FDICIA being one important breakpoint. This article empirically studies seasoned equity offerings (SEOs) by banks to understand how opacity and capital regulation interact to determine the timing of bank SEOs and their market valuation. SEOs, both by banks that are undercapitalized relative to regulatory standards and by well-capitalized banks, are fully discretionary, even before FDICIA. Both undercapitalized and well-capitalized banks experience similar and significantly negative stock price reactions to SEO announcements, and also have similar prior patterns of insider trading and similar economic drivers of the issuance decision. Moreover, post-SEO abnormal stock returns are similar to benchmark returns for both types of issuers in the long run, suggesting that, contrary to the well-documented evidence for industrial SEOs, investors understand the value implications of bank SEOs upon announcement. The evidence implies that undercapitalized banks' SEOs are more discretionary and that all bank SEOs are less opaque than implied by earlier studies.

Keywords: Bank Seasoned Equity Offers, Undercapitalization, Overcapitalization, Involuntary Issues, Voluntary Issues, Market Reaction, Long run performance, Long-run returns

JEL Classification: G12, G21, G32, G28

Suggested Citation

Ergungor, Ozgur Emre and Krishnan, C. N. V. and Laux, Paul A. and Singh, Ajai K. and Zebedee, Allan A., Examining Bank SEOs: Are Offers Made by Undercapitalized Banks Different? (January 14, 2009). Available at SSRN: https://ssrn.com/abstract=1341315 or http://dx.doi.org/10.2139/ssrn.1341315

Ozgur Emre Ergungor

affiliation not provided to SSRN

C. N. V. Krishnan (Contact Author)

Case Western Reserve University - Department of Banking & Finance ( email )

10900 Euclid Ave.
PBL 363
Cleveland, OH 44106-7235
United States
216-368-2116 (Phone)

HOME PAGE: http://weatherhead.case.edu/faculty/c-n-v-krishnan

Paul A. Laux

University of Delaware - Alfred Lerner College of Business and Economics ( email )

Office 306 Purnell Hall
Newark, DE 19716
United States
302-831-6598 (Phone)
302-831-3061 (Fax)

Ajai K. Singh

Department of Finance, University of Central Florida ( email )

College of Business Administration
12744 Pegasus Drive
Orlando, FL 32816
United States
407-823-0761 (Phone)
407-823-6676 (Fax)

Allan A. Zebedee

Clarkson University ( email )

Potsdam, NY 13699-5780
United States
315.268.3890 (Phone)

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