Post Offering Earnings Performance of Firms that Issue Seasoned Equity: The Role of Growth Opportunities

Abstract

This study finds that growth firms experience significant unanticipated deterioration in their earnings performance following their seasoned equity offerings (SEO), but mature firms do not share the same negative experience. This finding is consistent with the findings of long run post offering stock price underperformance documented in the literature. However, it is inconsistent with the findings of a weak positive impact of growth opportunities on the stock price reaction to the SEO announcement. The negative role of growth opportunities also contradicts the predictions of signaling models that growth potential of the issuing firm has a positive impact on the information content of the SEO. Overall, the findings in this study are consistent with the general implication of the overvaluation hypothesis that managers issue equity securities when they know their firm is not as valuable as what the market believes.

JEL Classification: G12, G14, G32