Heterogeneous Beliefs and Return Volatility Around Seasoned Equity Offerings (SEOs)
60 Pages Posted: 28 Feb 2017 Last revised: 22 Jan 2018
Date Written: January 18, 2018
This study provides an explanation for the volatility timing “puzzle” identified in the Seasoned Equity Offering (SEO) market. Our key conjecture is that the volatility dynamics around seasoned equity issuance reflects the time-varying heterogeneous beliefs of investors about the future prospects of the issuing firm. Consistent with this conjecture, we find that the heterogeneous beliefs of investors, as proxied by analyst forecast dispersion, is a significant determinant of SEO firm volatility around the event window. We obtain similar results using a more direct trade-based belief measure constructed using actual institutional trades. Further, the relation between heterogeneous beliefs and firm volatility weakens as the short selling constraints become binding, which suggests a potential causal link between heterogeneous beliefs and return volatility.
Keywords: Return Volatility; SEOs; Analyst Forecast Dispersion; Trade-based Heterogeneity in Beliefs; Optimism; Pessimism; Short Selling
JEL Classification: G10; G12; G14
Suggested Citation: Suggested Citation