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Firm age, idiosyncratic risk, and long-run SEO underperformance

Listed author(s):
  • Huang, Chia-Wei
  • Ho, Po-Hsin
  • Lin, Chih-Yung
  • Yen, Ju-Fang
Registered author(s):

    Post-issue stock underperformance is driven, at least in part, by young issuers with contemporary decline in idiosyncratic risk (proxied by expected idiosyncratic volatility) exposure. We show that the SEO long-run underperformance primarily occurs in young issuers. The intuition is that young firms generally have greater uncertainty about their future profitability due to greater intangible growth options. Therefore, when young firms finance investment from SEO proceeds, this uncertainty could be resolved because growth options are converted into assets in place, leading to a larger reduction in idiosyncratic risk than their matched non-issuers suggest. Furthermore, there is no evidence of post-issue stock underperformance and abnormal decline in idiosyncratic risk for mature issuers, supporting the growth option perspectives.

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    File URL: http://www.sciencedirect.com/science/article/pii/S1059056014001117
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    Article provided by Elsevier in its journal International Review of Economics & Finance.

    Volume (Year): 34 (2014)
    Issue (Month): C ()
    Pages: 246-266

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    Handle: RePEc:eee:reveco:v:34:y:2014:i:c:p:246-266
    DOI: 10.1016/j.iref.2014.08.009
    Contact details of provider: Web page: http://www.elsevier.com/locate/inca/620165

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