Studies On The SEO Behaviors Of China Listed Companies Under The Theory Of Windows Of Opportunities

The theory of windows of opportunity argues that when managers have private information of price misvaluation, they would prefer to issue equities to exploit such opportunities. Although investors will take the seasoned offering announcement as negative signals and correct their valuations, which can bring negative announcing price effects, they can not revalue the stock appropriately because of their irrationalities and information disadvantages. If they underreact to the bad news, new equities can still be sold at a price much higher than its intrinsic value, and firms can earn excess profit through this kind of timing. Since the stock is overvalued when it is issued, its performance will get poor in the long run.This article uses a sample of 80 listed companies which issues seasoned equity offerings, and chooses appropriate matching firms under the standard of firm size and ROE. It uses the ratio of market value to book value—M/B and the variable Misvalu which is derived from the Residual Income Model to substitute the windows of opportunity. The result of the Logistic regressions of sample firms and matching firms' decisions on SEO suggest that the overvaluation has a significantly positive influence on the seasoned equity offering decisions; the average cumulated excess returns around issuing announcement are apparently negative, but the most overvalued stock may not have the largest negative price reactions; the long-run average excess Buy-and-hold returns as well as the average cumulated excess returns show that firms may have a long run underperformance after the offering, and regression analysis suggests that the more a firm's stock is overvalued, the larger its decrease of the stock performances in the long run.