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SEO Risk Dynamics

Review of Financial Studies, 23 (11), 4026-4077

48 Pages Posted: 6 Dec 2005 Last revised: 7 May 2013

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

Multiple version iconThere are 2 versions of this paper

Date Written: November 1, 2010

Abstract

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

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

Murray D. Carlson (Contact Author)

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

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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