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Overinvestment and the Operating Performance of SEO Firms

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  • Fangjian Fu

Abstract

Prior studies have documented that firms' operating performance deteriorates following seasoned equity offerings (SEOs). This paper proposes and empirically tests the hypothesis that this poor performance is the result of managers' overinvestment. I find that, subsequent to the offering, SEO firms tend to invest more heavily than nonissuing control firms that are in the same industry and have enough financial slack and similar investment opportunities. More importantly, I find a negative correlation between postissue investment and operating performance, controlling for investment opportunities and preissue performance. Overinvestment results in a reduction in asset productivity and is more severe for firms with relatively fewer investment opportunities.

Suggested Citation

  • Fangjian Fu, 2010. "Overinvestment and the Operating Performance of SEO Firms," Financial Management, Financial Management Association International, vol. 39(1), pages 249-272, March.
    • Handle: RePEc:bla:finmgt:v:39:y:2010:i:1:p:249-272
    DOI: 10.1111/j.1755-053X.2010.01072.x
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