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

See all articles by Michael G. Hertzel

Michael G. Hertzel

Arizona State University (ASU) - Finance Department

Zhi Li

Chapman University - The George L. Argyros School of Business & Economics

Date Written: February 1, 2009

Abstract

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

Hertzel, Michael G. and Li, Zhi, Behavioral and Rational Explanations of Stock Price Performance Around SEOS: Evidence from a Decomposition of Market-to-Book Ratios (February 1, 2009). AFA 2008 New Orleans Meetings Paper. Available at SSRN: https://ssrn.com/abstract=945977 or http://dx.doi.org/10.2139/ssrn.945977

Michael G. Hertzel

Arizona State University (ASU) - Finance Department ( email )

W. P. Carey School of Business
P.O. Box 873906
Tempe, AZ 85287-3906
United States
480-965-6869 (Phone)
602-965-8539 (Fax)

Zhi Li (Contact Author)

Chapman University - The George L. Argyros School of Business & Economics ( email )

333 N. Glassell
Orange, CA 92866
United States
714-6287224 (Phone)

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