Behavioral and Rational Explanations of Stock Price Performance Around SEOS: Evidence from a Decomposition of Market-to-Book Ratios
43 Pages Posted: 20 Nov 2006 Last revised: 22 Apr 2009
Date Written: February 1, 2009
We examine the extent to which investment opportunities and/or mispricing motivates equity issuance and contributes to post-issue stock underperformance. We decompose market-to-book ratios into misvaluation and growth option components and find that issuing firms are both overvalued and have greater growth opportunities relative to non-issuers. Firms with greater growth opportunities invest more in capital expenditures and R&D after issuance, but do not experience lower post-issue stock returns. In contrast, issuing firms with greater mispricing tend to decrease long-term debt and/or increase cash holdings, and do earn lower returns. Our findings are consistent with behavioral explanations for post-issue stock price underperformance.
Keywords: seasoned equity offerings, long-run performance
JEL Classification: G14, G32
Suggested Citation: Suggested Citation