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

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  • Huang, Chia-Wei
  • Ho, Po-Hsin
  • Lin, Chih-Yung
  • Yen, Ju-Fang

Abstract

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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  • Huang, Chia-Wei & Ho, Po-Hsin & Lin, Chih-Yung & Yen, Ju-Fang, 2014. "Firm age, idiosyncratic risk, and long-run SEO underperformance," International Review of Economics & Finance, Elsevier, vol. 34(C), pages 246-266.
  • Handle: RePEc:eee:reveco:v:34:y:2014:i:c:p:246-266
    DOI: 10.1016/j.iref.2014.08.009
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    Cited by:

    1. Chiu, Yung-Chin & Liang, Woan-lih, 2015. "Do firms manipulate earnings before accelerated share repurchases?," International Review of Economics & Finance, Elsevier, vol. 37(C), pages 86-95.

    More about this item

    Keywords

    Firm age; Idiosyncratic risk; Growth option; Long-run performance; Seasoned equity offerings;

    JEL classification:

    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • 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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