Cash shortfall, SEO offer size, and SEO announcement returns

Bazrafshan, Ebrahim; Tarazi, Amine

doi:10.1080/1351847x.2022.2078666

Cited by 2 publications

(3 citation statements)

References 37 publications

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“…In empirically investigating the misuse of SEO proceeds, I test how cash proceeds from stock issuance affect overinvestments in the following year. This empirical methodology is in line with the statistics provided by Walker and Yost (2008), Hertzel and Li (2010), Kim and Weisbach (2008), DeAngelo, DeAngelo, and Stulz (2010), and Bazrafshan and Tarazi (2022), which demonstrate that the cash proceeds from stock issuance are reserved in the year of issuance and then utilized in the year following. As a result, stock issuance significantly increases investment projects in the first year following stock issuance.…”

Section: Resultssupporting

confidence: 78%

“…Consequently, the abnormal cash position prior to stock issuance could be a crucial factor for investors to consider. Third, investors can learn about lag-abnormal cash prior to the issuing of shares since the cash balance is publicly available and data acquisition is costless (Bazrafshan and Tarazi, 2022). Due to the low cost of information processing, all traders, even individual and retail traders, could include lag-abnormal cash in their trading decisions.…”

Section: Internal Funds Surplusmentioning

confidence: 99%

“…Moreover, since investors are not directly involved in the firm's operations, it is difficult for them to observe and evaluate the quality or quantity of the NPVs of the projects. Notably, the most active traders at important events, such as SEO announcements, are retail or individual investors who are known to struggle with difficult searches (DellaVigna and Pollet, 2009; Hirshleifer, Lim, and Teoh, 2009; Frank and Sanati, 2018; Bazrafshan and Tarazi, 2022). Hence, empirically determining investor responses based on SEO‐funded projects involves major identification challenges.…”

Section: Introductionmentioning

confidence: 99%

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Implications of Internal Funds Surplus for Determining Agency Spending of SEO Proceeds and Timing Incentives

Bazrafshan

2023

Financial Market

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According to the pecking order theory, firms with potential investment projects should raise external capital if and only if sufficient internal funds are not available. The theory can be violated if equity issuers are motivated by market timing and increasing funds for insiders’ benefits, indicating that firms may already have internal funds surplus without including external funds, but still issue equity. By controlling for future funds needs, the analyses show that issuers that engage in market timing and spend the SEO proceeds on value‐destroying projects are strongly associated with their internal funds surplus. Moreover, SEO announcement returns are lower for issuers with internal funds surplus. This pattern strongly supports the predictive ability of internal funds surplus to detect the need for external capital and ultimately to determine timing incentives and agency spending of SEO proceeds.

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