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Institutional Trading, Information Production, and the SEO Discount: A Model of Seasoned Equity Offerings

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  • Thomas J. Chemmanur
  • Yawen Jiao

Abstract

We develop a model of the seasoned equity offering (SEO) process, starting from the SEO announcement, through pre‐offer trading, and ending in the offering itself. We use our model to advance a new rationale for the existence of the SEO discount and SEO underpricing, and to analyze the role of institutional investors in SEOs. We show that the SEO discount is positively related to the extent of information asymmetry a firm faces, and SEOs with greater pre‐offer net buying by institutional investors have higher institutional allocations, greater oversubscription, and lower SEO discounts. Furthermore, our model predicts a positive link between the pre‐offer net buying by institutional investors and the magnitude of SEO underpricing and the long‐run post‐SEO operating performance.

Suggested Citation

  • Thomas J. Chemmanur & Yawen Jiao, 2011. "Institutional Trading, Information Production, and the SEO Discount: A Model of Seasoned Equity Offerings," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 20(1), pages 299-338, March.
    • Handle: RePEc:bla:jemstr:v:20:y:2011:i:1:p:299-338
    DOI: 10.1111/j.1530-9134.2010.00290.x
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    References listed on IDEAS

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    Cited by:

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    3. Chan, Kalok & Chan, Yue-Cheong, 2014. "Price informativeness and stock return synchronicity: Evidence from the pricing of seasoned equity offerings," Journal of Financial Economics, Elsevier, vol. 114(1), pages 36-53.
    4. Bajo, Emanuele & Croci, Ettore & Marinelli, Nicoletta, 2020. "Institutional investor networks and firm value," Journal of Business Research, Elsevier, vol. 112(C), pages 65-80.
    5. Chinmoy Ghosh & Scott Roark & C. Sirmans, 2013. "On The Operating Performance of REITs Following Seasoned Equity Offerings: Anomaly Revisited," The Journal of Real Estate Finance and Economics, Springer, vol. 46(4), pages 633-663, May.
    6. Huang, Kuo-Cheng & Wang, Yu-Chun, 2023. "How do investors underreact to seasoned equity offerings? Evidence from Taiwan's corporate governance evaluation," International Review of Financial Analysis, Elsevier, vol. 89(C).
    7. Qing He & Dongxu Li & Liping Lu & Terence Tai Leung Chong, 2019. "Institutional Ownership and Private Equity Placements: Evidence from Chinese Listed Firms," International Review of Finance, International Review of Finance Ltd., vol. 19(2), pages 315-346, June.
    8. Seth Armitage & Dionysia Dionysiou & Angelica Gonzalez, 2014. "Are the Discounts in Seasoned Equity Offers Due to Inelastic Demand?," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 41(5-6), pages 743-772, June.
    9. Chemmanur, Thomas J. & Hu, Gang & Li, Yingzhen & Xie, Jing, 2021. "Institutional trading, information production, and forced CEO turnovers," Journal of Corporate Finance, Elsevier, vol. 67(C).

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