Seasoned Equity Offerings by Small and Medium Sized Enterprises

34 Pages Posted: 13 Aug 2009 Last revised: 12 Feb 2010

See all articles by Cécile Carpentier

Cécile Carpentier

Laval University; Center for Interuniversity Research and Analysis on Organization (CIRANO); University of Lille II - European Center for Corporate Control Studies

Jean-Francois L'Her

Canada Pension Plan Investment Board; Caisse de Depot et Placement du Quebec (CDPQ)

Jean-Marc Suret

Laval University; Center for Interuniversity Research and Analysis on Organization (CIRANO); European Center for Corporate Control Studies

Multiple version iconThere are 2 versions of this paper

Date Written: December 23, 2009

Abstract

Most of the analyses of small firms’ decision to seek outside equity financing and the conditions thereof have concerned private firms. Knowledge of the risk and return of entrepreneurial ventures for outside investors is consequently limited. This paper attempts to fill this gap by examining the Canadian context, where small and medium-sized enterprises (SMEs) are allowed to list on a stock market. We analyze seasoned equity offerings launched by SMEs over the last decade. These public issuers can be considered low quality firms with poor operating performance. Managers issue equity before a large decrease in operating and stock market performance. Individual investors do not price the stocks correctly around the issue and incur significant negative returns in the years following the issue. This is particularly true for constrained issuers. We confirm that entrepreneurial outside equity attracts lemons, and that individual investors cannot invest wisely in emerging ventures. Probably as a consequence of individual investors’ lack of skill and rationality, the cost of outside equity financing of Canadian public SMEs is abnormally low.

Keywords: financing decision, equity offerings, small business, long-run performance, cost of equity, constraints

JEL Classification: G14, G32, L26

Suggested Citation

Carpentier, Cécile and L'Her, Jean-Francois and Suret, Jean-Marc, Seasoned Equity Offerings by Small and Medium Sized Enterprises (December 23, 2009). Small Business Economics, Forthcoming; Working Paper CIRANO 2010s-07. Available at SSRN: https://ssrn.com/abstract=1447521

Cécile Carpentier

Laval University ( email )

Pavilion Palasis Prince
Quebec, Quebec G1V 0A6
Canada

Center for Interuniversity Research and Analysis on Organization (CIRANO) ( email )

2020 rue University, 25th floor
Montreal, Quebec H3C 3J7
Canada

University of Lille II - European Center for Corporate Control Studies ( email )

2 rue de Mulhouse
BP381
Lille, 59800
France

Jean-Francois L'Her

Canada Pension Plan Investment Board ( email )

One Queen Street East
Suite 2600
Toronto, Ontario M5C 2W5
Canada

Caisse de Depot et Placement du Quebec (CDPQ) ( email )

1000, place Jean-Paul-Riopelle
Montreal, Quebec H2Z 2B3
Canada

Jean-Marc Suret (Contact Author)

Laval University ( email )

Accounting School
Quebec, P.Q. G1K 7P4
Canada
418-656-7134 (Phone)
418-656-7746 (Fax)

Center for Interuniversity Research and Analysis on Organization (CIRANO) ( email )

1130 rue Sherbrooke Ouest
Bureau 1400
Montreal, Quebec H3A 2M8
Canada

European Center for Corporate Control Studies ( email )

2 rue de Mulhouse
BP381
Lille, 59800
France

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