Market Reaction, Managerial Response, and the Classification of SEOs

Abstract

The registration date of a seasoned equity offering marks the beginning of the offering process and serves to galvanize further scrutiny and information gathering about the issuer. We posit that the market reaction to this new additional information influences issuers’ decisions about their SEOs. Consistent with this view, we develop a parsimonious ex ante measure that successfully separates stock offerings designed to time the market (Regular offers) from those presumably used for bona fide corporate reasons such as to fund investments (Improved offers). Improved offerings, where the dollar offer size exceeds the amount filed initially at registration, record a significantly positive price reaction on the offer date and do not underperform their benchmark in the post-issuance period. Conversely, Regular offers underperform in both instances. Further, Improved SEO firms make higher investments and generate stronger institutional demand compared to Regular SEOs.

Keywords: SEOs, Market Timing, Managerial Response, Market Reaction

JEL Classification: G14, G32, G39