Review of Financial Studies, 23 (11), 4026-4077
48 Pages Posted: 6 Dec 2005 Last revised: 7 May 2013
Date Written: November 1, 2010
This paper investigates the dynamics of firm level beta and volatility around seasoned equity offerings. Beta increases prior to the SEO and decreases thereafter. This pattern is generally consistent with a real options explanation of SEO underperformance, but existing models predict a sharp risk drop, while we find a gradual decline. To reconcile this difference, we extend the theory to consider investment commitment and internal financing. In the cross-section, we show that firms with high prior return runups experience larger post-issuance underperformance, as well as more substantial post-issuance declines in beta. By contrast, large market-wide runups, which might be taken as a measure of sentiment, do not precede either postissuance underperformance or post-issuance beta declines. Finally, equity issues coincide with low points in both own firm and market-wide volatility, suggesting the possibility of volatility timing in corporate financing activities.
Keywords: Seasoned Equity Offering, Real Options, Dynamic Risk, Dynamic Beta, Investment Commitment, Time-to-Build, Long Run Event Studies, Abnormal Return
JEL Classification: G31, G32
Suggested Citation: Suggested Citation
Carlson, Murray and Fisher, Adlai J. and Giammarino, Ron, SEO Risk Dynamics (November 1, 2010). Review of Financial Studies, 23 (11), 4026-4077. Available at SSRN: https://ssrn.com/abstract=868284 or http://dx.doi.org/10.2139/ssrn.868284