Seasoned Equity Offerings, Corporate Governance, and Investments

Review of Finance, Forthcoming

42 Pages Posted: 27 Apr 2011 Last revised: 29 Mar 2013

See all articles by E. Han Kim

E. Han Kim

University of Michigan, Stephen M. Ross School of Business

Amiyatosh Purnanandam

University of Michigan, Stephen M. Ross School of Business

Date Written: April 26, 2011

Abstract

We find weak governance is a primary reason investors react negatively to the announcement of seasoned equity offerings (SEOs). Using a difference-in-differences approach, we find investors worry about non-productive use of SEO proceeds when external pressure for good governance lifts due to an external shock. Investors react negatively only when treated firms raise funds to increase capital investments. Market reaction is more negative when issuers have prior records of value-reducing acquisitions and weaker managerial wealth sensitivity to shareholder value. The magnitudes of these governance effects are surprisingly large, explaining most of the previously documented negative market reactions to primary SEOs.

Keywords: Governance, Equity Issuance, Business Combination Statutes, Managerial Incentives, Signaling, Adverse Selection Problem

JEL Classification: G32, G34

Suggested Citation

Kim, E. Han and Purnanandam, Amiyatosh, Seasoned Equity Offerings, Corporate Governance, and Investments (April 26, 2011). Review of Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=1823682 or http://dx.doi.org/10.2139/ssrn.1823682

E. Han Kim (Contact Author)

University of Michigan, Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI MI 48109
United States
734-764-2282 (Phone)
734-763-3117 (Fax)

Amiyatosh Purnanandam

University of Michigan, Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI MI 48109
United States

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