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2016-12-23T18:49:38

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Prior studies have documented that firms' operating performance deteriorates following seasoned equity offerings (SEOs) Previous studies have documented that firms' operating performance deteriorates following seasoned equity offerings (SEOs). Meanwhile, the postissue stock returns of SEO firms are inordinately low relative to various benchmarks of expected returns.1 A popular explanation seems to be managers' timing the market where their decision of SEO is in anticipation of poor future performance. In this paper, I present an overinvestment explanation for poor firm performance after SEOs. Managers' overinvestment of SEO proceeds leads to this poor performance. More specifically, I find that controlling for the differences in industry, investment opportunities, and financial slack, SEO firms still invest more heavily than nonissuing firms and this excess investment is negatively related to postissue operating performance. Further evidence indicates that overinvestment significantly reduces the asset productivity of SEO firms.Why do managers of SEO firms overinvest after equity offerings? Jensen (1986Jensen ( , 1993 argues that managers have various incentives to grow their firm beyond the optimal size. They can enjoy more private benefits by managing a larger firm and their compensation is dependent upon asset growth rather than profitability. Seasoned equity offerings are an effective way to grow firm size. For example, the average SEO proceeds in my sample are 24% of the issuing firm's market value and they are all cash. The probability of overinvestment increases with free cash flow under managers' control.

The long-run abnormal returns following both stock repurchases and seasoned equity offerings disappear for the events in 2003–2012. The disappearance is associated with the changing market environment: increased institutional investment, decreased trading costs, improved liquidity, and enhanced regulations on corporate governance and information disclosure. In response to the more efficient pricing of stocks, firms become less opportunistic in stock repurchases and offerings. Recent events of stock repurchases and offerings are motivated more by business-operating reasons than to exploit mispricing. Both external market factors and internal firm factors contribute to the disappearance of the postevent abnormal returns. Our findings on the recent events contrast with those of earlier studies and shed light on how the changing market environment affects both asset pricing and corporate behavior. This paper was accepted by Wei Jiang, finance.

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We propose and implement a direct test of the hypothesis of oligopolistic competition in the U.S. underwriting market against the alternative of implicit collusion among underwriters. We construct a simple model of interaction between heterogeneous underwriters and heterogeneous firms and solve it under two alternative assumptions: oligopolistic competition among underwriters and implicit collusion among them. The two solutions lead to different equilibrium relations between the compensation of underwriters of different quality on one hand and the time-varying demand for public incorporation on the other hand. Our empirical results, obtained using 39 years of initial public offering (IPO) data, are generally consistent with the implicit collusion hypothesis that banks, especially larger ones, seem to internalize the effects of their underwriting fees and IPO pricing on their rivals. This paper was accepted by Neng Wang, finance.