An evaluation of the stock price announcement effect of seasoned equity offerings

This dissertation evaluates the stock price announcement effect of seasoned equity offerings. Prior research has shown that, on average, announcements of seasoned equity offerings are associated with a negative market reaction. Moreover, prior research has explained why reactions are typically negative. This study takes the opposite approach, and evaluates the characteristics of firms that experience a favorable market reaction to their equity offer. These firms represent roughly one third of all equity issuers. Several hypotheses are proposed, related to market timing, growth opportunities, information asymmetry, capital structure rebalancing, and the dilution to existing shareholders. The statistical tests revealed two key findings. First, favorable reactions are associated with greater pre offer stock price appreciation and higher market to book ratios. This suggests that investors believe firms with these characteristics are raising capital to fund growth opportunities rather than to attempt to issue overvalued shares. This finding is important in a theoretical sense because it contributes to the ongoing debate about whether prior stock price appreciation reflects overvaluation or growth opportunities. Second, equity offers with positive reactions were made by firms that have higher ratios of long term debt to total assets. This finding suggests that over-levered firms will find it value maximizing to readjust back to optimal debt levels. This finding is important for research on capital structure because it supports the theory that there exists an optimal level of capital structure. Each of these findings is important in a practical sense, because it is important for firms to know that investors may react favorably to seasoned equity offers if the investors expect the proceeds to be used for funding growth opportunities or for reducing debt levels to adjust back to an optimal capital structure. Finally, future researchers might find it interesting to explore whether the relationships found in this study are still valid after the financial crisis of 2008.