Seasoned Equity Offerings, Limited Investor Attention, and Post-Announcement Drift: Theory and Evidence

Abstract

We develop a model of seasoned equity offerings (SEOs) under limited investor attention. While existing models of equity issues assume that all investors pay immediate attention to SEO announcements, we assume that only a fraction of investors pay immediate attention, with the remaining fraction paying delayed attention. We develop three testable predictions from our theoretical model not generated by existing equity issue models. First, in addition to an announcement effect, there will be a post-announcement stock return drift following SEOs. Second, the announcement effect of an SEO will be increasing and the post-announcement drift will be decreasing in the fraction of equity market investors paying immediate attention to the SEO announcement. Third, both the announcement effect and the post-SEO drift will have predictive power for the post-SEO operating performance of firms. We test the above three predictions of our theoretical model using the media coverage of firms prior to SEO announcements as our proxy for investor attention and find consistent evidence. Our baseline empirical results are robust to making use of abnormal investor attention (instead of the actual investor attention) received by firms, allowing us to rule out the possibility that our results are driven by the characteristics of certain firms that receive greater investor attention compared to others. We also use an instrumental variable analysis to show that the above empirical relationships are causal. Lastly, we demonstrate the robustness of our results using SEC EDGAR filing searches by investors as an alternative proxy for investor attention.

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

JEL Classification: G23, G24, G32