Seasoned equity offerings: What firms say, do, and how the market reacts

Intended use of proceeds and the long-run performance of seasoned equity issuers

“…Our findings are consistent with Hertzel and Li (2007), who find that issuers with higher growth options invest more after the SEO and do not experience poor post-issue stock returns, but issuers with greater overvaluation decrease long-term debt and increase cash after the issue and suffer poor long-run stock performance. Our findings differ, however, from the result of Walker and Yost (2008) that issuers intending to decrease debt have subsequent improvements in industry-adjusted operating performance.…”

“…Accordingly, we expect little evidence of long-run underperformance for these issuers. This hypothesis is consistent with the findings of Walker and Yost (2008) that issuers stating specific investment plans experience a relatively favorable market reaction at the offer announcement and an improvement in industry-adjusted operating performance.…”

“…First, this paper is the first, to our knowledge, to investigate the link between the ex-ante stated use of proceeds and post-SEO long-run stock performance in the U.S. equity markets. Next, we take a second look at changes in operating performance across ex-ante stated uses and provide important new insights by employing a broader sample than that studied by Walker and Yost (2008). Our third contribution is that the partitioning of SEOs on the basis of the intended use of proceeds provides an opportunity to distinguish between timing and non-timing motives.…”

“…For example, Hertzel and Li (2007) find that issuing firms that are overvalued tend to reduce debt after the issue. A different insight is offered by Walker and Yost (2008), who find that firms with a stated intention of paying down debt actually have leverage ratios three years after the SEO that are similar to leverage ratios prior to the SEO. Thus, firms issuing equity to refinance may be opportunistic market timers and, therefore, we expect these firms to experience poor long-run performance.…”

Understanding seasoned equity offerings of Chinese firms

“…Kim and Weisbach (2008) document that firms spend incremental capital mainly on R&D and capital expenditures, which suggests that firms normally use SEOs to raise additional capital in order to finance investment and growth. Walker and Yost (2008) provide evidence that no matter what the stated usage of capital raised from SEOs is, ex post, firms always use SEOs proceeds to increase capital expenditures and R&D. Harjoto and Garen (2003) find that listed firms with greater growth potential are more likely to conduct SEOs after their IPOs.…”