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The Impacts of Overinvestment and Financial Constraints on Seasoned Equity Offering Long-Run Performance

Author

Listed:
  • Pei-shan Lu

    (Department of Accounting, Chaoyang University of Technology, Taichung, Taiwan,)

  • Weiju Young

    (Department of Accounting, Chaoyang University of Technology, Taichung, Taiwan)

  • Meng Sung Hsieh

    (Department of Finance, Feng-Chia University, Taichung, Taiwan.)

Abstract

This study considers overinvestment and financial constraints as factors that associate with managerial incentives of firms conducting seasoned equity offerings (SEOs). The results show that pre-issue overinvestment and financial slack are negatively related to the long-run performance of SEO firms. It implies that SEOs of firms with these two characteristics are driven by managerial incentive misalignment, resulting in their lackluster long-run performance after SEOs. In other words, overinvesting and financially unconstrained firms may conduct SEOs due to managers' empire-building desires. These results should remind the board of directors to prevent managers' equity financing from serious overinvestment and that long-run investors should avoid buying new-issue shares of firms with overinvestment and financial slack.

Suggested Citation

  • Pei-shan Lu & Weiju Young & Meng Sung Hsieh, 2017. "The Impacts of Overinvestment and Financial Constraints on Seasoned Equity Offering Long-Run Performance," International Journal of Economics and Financial Issues, Econjournals, vol. 7(5), pages 216-224.
    • Handle: RePEc:eco:journ1:2017-05-26
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    References listed on IDEAS

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    More about this item

    Keywords

    Seasoned Equity Offerings (SEOs); Overinvestment; Financial Constraints; Managerial Incentives;
    All these keywords.

    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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