IPOs and SEOs, Real Investments, and Market Timing: Emerging Market Evidence

47 Pages Posted: 11 Jun 2016

See all articles by Kavita Wadhwa

Kavita Wadhwa

Institute of Chartered Financial Analysts of India (ICFAI) - IBS - Hyderabad

V. N. Reddy

Institute of Chartered Financial Analysts of India (ICFAI) - The Icfai University (IFHE), Hyderabad

Abhinav Goyal

University of Liverpool - Management School (ULMS)

Abdul Mohamed

Cranfield University - School of Management

Date Written: June 8, 2016

Abstract

This paper uses market-to-book ratio decomposition to examine whether firms that issue equity through initial public offerings or seasoned equity offerings exploit mispricing because of investor enthusiasm or to finance growth opportunities. We find strong evidence that, on average, firms do not issue mispriced stocks to exploit investors but, rather, to finance their investment opportunities in the form of real assets, inventory, and capital expenses. Firms that issue overvalued stocks with the view to increase their cash holdings experience poor long-run performance. Overall, our results show that stock mispricing drives equity offerings through IPOs and SEOs. Nonetheless, high transparency and balanced regulation in the marketplace deter issuing firms from investing their proceeds in non–value-creating activities. This evidence is robust to alternative measures of valuation and long-run performance.

Keywords: IPOs, SEOs, market-timing, investment funding, market-to-book ratio, residual income model, long-run performance

JEL Classification: G31, G32

Suggested Citation

Wadhwa, Kavita and Reddy, Vanga Nagi and Goyal, Abhinav and Mohamed, Abdul, IPOs and SEOs, Real Investments, and Market Timing: Emerging Market Evidence (June 8, 2016). Journal of International Financial Markets, Institutions and Money, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2792209

Kavita Wadhwa

Institute of Chartered Financial Analysts of India (ICFAI) - IBS - Hyderabad ( email )

62, Nagarjuna Hill
Panjagutta
Hyderabad, TX AP 501504
India

Vanga Nagi Reddy

Institute of Chartered Financial Analysts of India (ICFAI) - The Icfai University (IFHE), Hyderabad ( email )

Donthanapally Shankarapalli Road
RAJAWALA ROAD
Hyderabad, RI Andhra Pradesh 501203
India

Abhinav Goyal (Contact Author)

University of Liverpool - Management School (ULMS) ( email )

Chatham Street
Liverpool, L69 7ZH
United Kingdom
+44-151-795-2150 (Phone)

Abdul Mohamed

Cranfield University - School of Management ( email )

Bedfordshire, MK43 0AL
United Kingdom

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