Corporate Investment and Asset Price Dynamics: Implications for SEO Event Studies and Long-Run Performance

7th Annual Texas Finance Festival Paper

Sauder School of Business Working Paper

33 Pages Posted: 16 May 2005

See all articles by Murray Carlson

Murray Carlson

University of British Columbia (UBC) - Sauder School of Business

Adlai J. Fisher

University of British Columbia (UBC) - Sauder School of Business

Ron Giammarino

University of British Columbia (UBC) - Sauder School of Business

Date Written: December 5, 2004

Abstract

We present a rational theory of return behavior around seasoned equity offerings, including a pre-issuance price runup, negative announcement effect, and long-run post-issuance underperformance. The main result uses real option principles to relate SEO's to an endogenous decrease in expected returns. Equity issues are associated with firm expansions. When firms invest, they convert growth options to assets in place. Even when the new assets are risky, they will be less risky than the options they replace. Although both size and book-to-market effects are present in our model, standard matching procedures fail to capture the dynamics of risk and expected return. We calibrate the model, and show that it gives a close match to the primary empirical moments.

Keywords: Event studies, SEOs, Long-Run Performance, dynamic corporate decisions

JEL Classification: G14, G3, G32, C32, C51

Suggested Citation

Carlson, Murray D. and Fisher, Adlai J. and Giammarino, Ronald, Corporate Investment and Asset Price Dynamics: Implications for SEO Event Studies and Long-Run Performance (December 5, 2004). 7th Annual Texas Finance Festival Paper; Sauder School of Business Working Paper. Available at SSRN: https://ssrn.com/abstract=562942 or http://dx.doi.org/10.2139/ssrn.562942

Murray D. Carlson

University of British Columbia (UBC) - Sauder School of Business ( email )

2053 Main Mall
Vancouver, BC V6T 1Z2
Canada
604-822-8358 (Phone)

Adlai J. Fisher

University of British Columbia (UBC) - Sauder School of Business ( email )

2053 Main Mall
Vancouver, BC V6T 1Z2
Canada
604-822-8331 (Phone)
604-822-4695 (Fax)

HOME PAGE: http://finance.sauder.ubc.ca/~fisher

Ronald Giammarino (Contact Author)

University of British Columbia (UBC) - Sauder School of Business ( email )

2053 Main Mall
Vancouver BC V6T 1Z2
Canada
604-822-8357 (Phone)
604-822-4695 (Fax)

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