The Role of Investor Attention in Seasoned Equity Offerings: Theory and Evidence

86 Pages Posted: 12 Feb 2020 Last revised: 28 Jun 2021

See all articles by Thomas J. Chemmanur

Thomas J. Chemmanur

Boston College - Carroll School of Management

Karen Simonyan

Suffolk University - Department of Finance

Yu (Yvonne) Wang

University of Arkansas - Department of Finance

Xiang Zheng

University of Connecticut - Department of Finance

Date Written: June 26, 2021

Abstract

Models of seasoned equity offerings (SEOs) such as Myers and Majluf (1984) assume that all investors in the economy pay immediate attention to SEO announcements and the pricing of SEOs. In this paper, we analyze, theoretically and empirically, the implications of only a fraction of investors in the equity market paying immediate attention to SEO announcements. We first show theoretically that, in the above setting, the announcement effect of an SEO will be positively related to the fraction of investors paying attention to the announcement and that there will be a post-announcement stock-return drift that is negatively related to investor attention. In the second part of the paper, we test the above predictions using the media coverage of firms announcing SEOs as our main proxy for investor attention, and find evidence consistent with the above predictions. In the third part of the paper, we develop and test various hypotheses relating investor attention paid to an issuing firm to various SEO characteristics. We empirically show that institutional investor participation in SEOs, the post-SEO equity market valuation of firms, SEO underpricing, and SEO valuation are all positively related to investor attention. Lastly, we also use the number of SEC EDGAR file downloads as an alternative proxy for investor attention, and our findings are robust to this alternative investor attention measure. The results of our identification tests show that the above results are causal.

Keywords: Seasoned Equity Offerings, Limited Attention, Announcement Effect, Post-announcement Drift

JEL Classification: G23, G24, G32

Suggested Citation

Chemmanur, Thomas J. and Simonyan, Karen and Wang, Yu and Zheng, Xiang, The Role of Investor Attention in Seasoned Equity Offerings: Theory and Evidence (June 26, 2021). Available at SSRN: https://ssrn.com/abstract=3517421 or http://dx.doi.org/10.2139/ssrn.3517421

Thomas J. Chemmanur (Contact Author)

Boston College - Carroll School of Management ( email )

Finance Department, 436 Fulton Hall
Carroll School of Management, Boston College
Chestnut Hill, MA 02467-3808
United States
617-552-3980 (Phone)
617-552-0431 (Fax)

HOME PAGE: http://https://www2.bc.edu/thomas-chemmanur/

Karen Simonyan

Suffolk University - Department of Finance ( email )

8 Ashburton Place-Beacon Hill
Boston, MA 02108-2770
United States
(617) 973-5385 (Phone)

Yu Wang

University of Arkansas - Department of Finance ( email )

Fayetteville, AR 72701
United States

Xiang Zheng

University of Connecticut - Department of Finance ( email )

School of Business
2100 Hillside Road
Storrs, CT 06269
United States

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