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Fundamentals, Market Timing, and Seasoned Equity Offerings

  • Harry DeAngelo
  • Linda DeAngelo
  • René M. Stulz

Firms conduct SEOs to resolve a near-term liquidity squeeze, and not primarily to exploit market timing opportunities. Without the SEO proceeds, 62.6% of issuers would have insufficient cash to implement their chosen operating and non-SEO financing decisions the year after the SEO. Although the SEO decision is positively related to a firm's market-to-book (M/B) ratio and prior excess stock return and negatively related to its future excess return, these relations are economically immaterial. For example, a 150% swing in future net of market stock returns (from a 75% gain to a 75% loss over three years) increases by only 1% the probability of an SEO in the immediately prior year. Strikingly, most firms with quintessential "market timer" characteristics fail to issue stock and a non-trivial number of mature firms do issue stock, with current and former dividend payers raising more than half of all issue proceeds.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 13285.

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Date of creation: Jul 2007
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Handle: RePEc:nbr:nberwo:13285
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