Strategic R&D Investment Around Seasoned Equity Offerings: Evidence from High-Technology Industries

Abstract

Focusing on high-technology issuers, this study provides new evidence that managers strategically overinvest in research and development (R&D) projects prior to seasoned equity offerings (SEOs). It corroborates the theoretical prediction that managers with short-term valuation pressure tend to overinvest in long-term projects to elevate investors’ growth expectations (Bebchuk and Stole 1993). I find that issuers with more intensive pre-SEO R&D expenditures exhibit lower productivity in terms of innovative output and operating performance following offerings, which is a primary manifestation of overinvestment. Such issuers also have higher price run-ups prior to offerings and lower long-term stock returns thereafter, suggesting that investors initially overestimate the future benefits of R&D expenditures but are subsequently disappointed by their low productivity.

Keywords: R&D; innovation productivity; investor optimism; analyst forecast; nonfinancial disclosure; seasoned equity offerings

JEL Classification: M40, G11, G14, O30