SEO Timing, the Cost of Equity Capital, and Liquidity Risk

48 Pages Posted: 23 Jan 2010

See all articles by Ji-Chai Lin

Ji-Chai Lin

Hong Kong PolyU

YiLin Wu

National Taiwan University - Department of Economics

Date Written: January 21, 2010


This paper uses a simple approach to capture time-varying risks surrounding seasoned equity offerings to shed further light on SEO timing and post-issue underperformance. We find that a steady decline in issuing firms’ cost of equity capital to its lowest point prompts them to file SEOs. The decline is largely due to (1) market-wide improvements in both market risk and liquidity risk, starting about six months prior to SEO filing, and (2) an additional decrease in SEO firms’ liquidity risk just prior to SEO filing. Liquidity risk of SEO firms rebounds but stays relatively low in the filing month, and remains relatively low at issuance and thereafter for two to three years, while their market risk are not significantly different from that of their matched firms. Controlling for the (lower) liquidity risk, along with the market risk, is sufficient to show no post-issue abnormal returns. We also find that the lower liquidity risk allows issuing firms to reduce their offering price discount and mitigate the negative SEO announcement effect. Our findings imply that, instead of exploiting market inefficiency, managers time SEOs by following the improvements in market conditions and in their own stocks’ liquidity environment in order to minimize their firms’ cost of equity capital.

Keywords: Liquidity risk, Seasoned equity offerings, SEO timing, Cost of equity capital

JEL Classification: G14,; G32

Suggested Citation

Lin, Ji-Chai and Wu, YiLin, SEO Timing, the Cost of Equity Capital, and Liquidity Risk (January 21, 2010). Available at SSRN: or

Ji-Chai Lin (Contact Author)

Hong Kong PolyU ( email )

M715, Li Ka Shing Tower
Hung Hom, Kowloon

YiLin Wu

National Taiwan University - Department of Economics ( email )

21 Hsiu Chow Rd
Taipei, 10020

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