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Stock mispricing and SEO decisions: how does the market respond to the timing behavior?

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  • Yi-Wen Chen
  • Meng-Na Huang
  • Chu-Bin Lin

Abstract

This article examines how stock mispricing influences firms' decisions regarding seasoned equity offerings (SEOs) and how the market reacts to them. Utilizing a firm-specific stock mispricing index from Stambaugh, Yu, and Yuan (2015. Arbitrage Asymmetry and the Idiosyncratic Volatility Puzzle. Journal of Finance 70:1903–1948), we find that stock overpricing is positively associated with the likelihood of conducting an SEO but negatively associated with short-run abnormal returns. The negative relation between stock overpricing and short-run abnormal returns is stronger among firms that receive greater investor attention. In addition, we observe the extent of stock mispricing is attenuated following SEO announcements of both overpricing and underpricing stocks. These findings are consistent with market timing theory and suggest that, to a certain extent, the stock market recognizes inside managers' market timing behavior and adjusts stock prices accordingly. Our results are robust to alternative event windows, model specifications, and investor attention measures.

Suggested Citation

  • Yi-Wen Chen & Meng-Na Huang & Chu-Bin Lin, 2025. "Stock mispricing and SEO decisions: how does the market respond to the timing behavior?," The European Journal of Finance, Taylor & Francis Journals, vol. 31(10), pages 1338-1367, July.
    • Handle: RePEc:taf:eurjfi:v:31:y:2025:i:10:p:1338-1367
    DOI: 10.1080/1351847X.2025.2479635
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