Search results

This chapter investigates the cost of public debt for firms using a comprehensive sample consisting of 17,368 industrial bond issues from 1970 to 2011. The empirical evidence shows that yield spreads for seasoned bond issues are significantly lower than those for initial bond issues. This seasoning effect is robust across different sample periods, subsamples, and model specifications. On average, the yield spreads for seasoned bond issues are around 50 bps lower than those for initial bond issues. This difference cannot be explained by other bond and firm characteristics. The seasoning effect is more pronounced for firms with higher levels of uncertainty, lower information disclosure quality, and longer time intervals between the first and subsequent issues. Our empirical findings provide supportive evidence for the extant theories that aim to rationalize the information role in determining the cost of capital.

We provide evidence of stock market performance prior to announcements of the assuance or retirement of securities which is consistent with Myers and Majluf [1984] and Miller and Rock [1985]. Stocks of firms issuing seasoned common equity are significantly over‐valued in the market prior to the issue, but in the year following, decline to their original level. Stocks of firms issuing convertible debt also are over‐valued, but to a lesser degree than that of firms issuing seasoned equity. Stock of firms issuing straight debt appears to be neither over‐valued nor undervalued. The after‐market firm performance, measured by earnings, cash flows or dividends, is consistent with Miller and Rock. We document a decline in after‐market performance for firms issuing convertible or straight debt and an improvement for those repurchasng shares. However, contrary to predictions, we find that firms issuing seasoned equity do not have lower earnings or cash flows in the following year, and increase their rate of dividend payment as well. We document evidence indicating that firms issue equity to maintain or increase dividends. The market anticipates the dividend increase and shows no response to announcements of dividend changes following an equity issue. However, we are unable to explain why the market reacts in such a negative manner to equity issues, when the after‐market performance of the firm is as expected.

The authors compare the post-issue stock and operating performance of rights issue versus public offer firms using Korean data. The authors find that the stock returns of rights issue firms are less negative than those of public offering firms during the three years subsequent to the seasoned equity offering. The authors further find that the profitability of rights offering firms is superior to those of public offering firms and that the ratio of sales to assets for rights issue firms is much higher over the post-issue period. The results substantiate Heinkel and Schwartz’s (1986) and Eckbo and Masulis’ (1992) theoretical models that posit firms with better quality tend to select the rights issue rather than public offer method when issuing seasoned equity.

Seasoned equity offerings (SEOs) are sales of stock after the initial public offering. They are a means to raise funds through the sale of stock rather than the issuance of additional debt. We propose a method to predict the characteristics of firms that undertake this form of financing. Our procedure is based on logistic regression where firm-specific variables are obtained from the perspective of the firm's need to raise cash such as high debt ratios, high current liabilities, reduction and changes in current debt, significant increase in capital expenditure, and cash flows in terms of cash as a percentage of assets.

Using a sample of 6,198 US firms that went public from 1975 to 2004, the purpose of this paper is to examine when these firms come back to the equity market and investigate the determinants of the timing decision.

By properly modeling the time between two consecutive equity offerings using the duration analysis, the author tests different hypotheses in a unified framework and investigates their relative importance in explaining the timing decision of seasoned equity issuance.

The paper documents that firms often return for a new round of equity issuance shortly after the preceding one. First seasoned equity offerings (SEOs) after the IPO are more likely to be conducted at a faster speed than subsequent (follow-on) SEOs. The duration analysis shows that first SEOs are more likely to ride the aggregate stock market wave and take advantage of the idiosyncratic mispricing of the stock than follow-on SEOs. On the contrary, both macroeconomic and firm-specific growth opportunities are more important for follow-on SEOs than for first SEOs.

The paper employs a novel econometric method to depict a dynamic picture of SEO decisions. The results provide a possible explanation to reconcile the discrepancies in the findings of prior studies. Namely, those studies examining mostly first SEOs could bias toward the timing hypothesis, while those studies focussing on follow-on SEOs is more likely to find evidence that supports the need for growth.

This case was researched using publicly available sources, including Mercury Systems financial filings and press releases, news stories about the seasoned equity offering, financial information from Bloomberg and industry information from IBISWorld Industry Reports and articles related to seasoned/secondary equity offerings, intangible asset valuation and the use of revolving lines of credit. Quotes are taken from Mercury financial reports and press releases and express the (optimistic) opinions of company executives.

Mercury Systems, a technology company in the aerospace and defense industry, announced a six million share seasoned stock offering in June 2019. This resulted in a 6% stock price decrease. A stock price decrease is a typical event when a firm announces the issuance of new common shares, but with Mercury Systems, there were concerns about how much money the firm needed to fund its strategy of growth through acquisitions. If internally generated funds were not sufficient, should the firm issue debt or have another seasoned equity issue? Students will look at the objectives and success of the most recent seasoned equity issue, determine future funds needs and how the firm should finance these needs.

This case is appropriate for undergraduate and graduate students in corporate finance electives. Typically, topics such as seasoned equity offerings are not covered in introductory courses, so this is recommended for finance electives. Even in advanced finance courses, sometimes there is insufficient time to cover seasoned equity offerings.

The purpose of this paper is to contribute to the literature on seasoned equity offerings (SEOs) by examining the underpricing of European real estate corporations and identifying determinants explaining the phenomenon of setting the offer price at a discount at SEOs.

With a sample of 470 SEOs of European real estate investment trusts (REITs) and real estate operating companies (REOCs) from 2004 to 2018, multivariate regression models are applied to test for theories on the pricing of SEOs. This paper furthermore tests for differences in underpricing for REITs and REOCs as well as specialized and diversified property companies.

Significant underpricing of 3.06 percent is found, with REITs (1.90 percent) being statistically less underpriced than REOCs (5.08 percent). The findings support the market timing theory by showing that managers trying to time the equity market gain from lower underpricing. Furthermore, underwritten offerings are more underpriced to reduce the risk of the arranging bank, but top-tier underwriters are able to reduce offer price discounts by being more successful in attracting investors. The results cannot support the value uncertainty hypothesis, but they are in line with placement cost stories. In addition, specialized property companies are subject to lower underpricing.

An optimal issuance strategy taking into account timing, relative offer size and the choice of the underwriter can minimize the amount of “money left on the table” and therefore contribute to the lower cost of raising capital.

This is the first study to investigate SEO underpricing for European real estate corporations, pricing differences of REITs and REOCs in seasoned offerings and the effect of market timing on the pricing of SEOs.

The purpose of this paper is to examine the impact of earnings smoothing on the underpricing of seasoned equity offerings (SEOs). It aims to investigate whether earnings smoothing can add value to firms by reducing the degree of SEO underpricing.

The sample of US common stock seasoned equity offerings (SEOs) by non‐regulated firms during 1989‐2009 was used to conduct various cross‐section, univariate, and multivariate tests, using several proxies for earnings smoothing, in order to confirm the impact of earnings smoothing on the degree of SEO underpricing. Three‐stage least square estimation was used to address the possible endogeneity of pricing and earnings smoothing.

Smooth earnings performance resulting from discretionary accruals is negatively related to SEO underpricing and improves earnings informativeness. Consistent with risk management and signaling theories, managers' efforts to produce smooth earning reports may add value to their firms. Based on the mean values for SEOs, such smoothing reduces underpricing by $0.33 per share offered and increases the value of the average offering by $1.65 million. Smoothed earnings also conveys information about the firms' future performance, as firms with a long historical pattern of smooth earnings prior to SEOs significantly outperform, for at least three years after the SEO, those with more volatile earnings, with respect to stock returns and operating performance.

The paper contributes specifically to the current literature on earnings smoothing by demonstrating that high quality firms that expect larger quantity of cash flows in the near future are more likely to actively smooth earnings via discretionary accruals before SEOs to reduce underpricing. The paper contributes generally by showing that firms can signal their quality to outside investors by showing smooth earnings over a long period of time and such firms are more likely to experience a lower degree of underpricing through SEO episodes.

We revisit the performance of seasoned equity offerings (SEOs) in Japan against the backdrop of the Tokyo Stock Exchange's historical nine-year run up from 1980 to 1989, with the time period chosen for the purpose of comparison to previous studies. We analyze the long-run performance of 427 issues or 387 Japanese firms that conducted SEOs from 1980–1990. Initial results indicate that SEOs firms underperform standard benchmarks over subsequent 3- and 5-year periods after issuing. The results from value-weighted portfolios, however, show that SEOs outperform three out of five benchmarks. The results from the Fama-French three factor model show that all of the 16 SEO portfolios (formed by size and book-to-market quartiles) have positively significant intercepts, and most loadings are significant. The size loadings from time series three-factor model of value-weighted portfolio show that SEO sample firm returns exhibit characteristics of large firms as opposed to those of small firms under equally weighted portfolios. Our results support the arguments that (1) the returns of issuing firms are not idiosyncratic, but rather covary with the common factors of nonissuing firms and that (2) the underperformance of SEOs is sensitive to the precise test specifications.

Short‐term cash need plays a critical role in equity issuance decisions. Consequently, the ease with which a seasoned equity offer (SEO) is completed can have a direct effect on the cost of raising equity. The purpose of this paper is to examine whether liquidity is likely to affect the ease with which an offer is completed, as proxied by the length of the offer.

This study uses multiple regression analysis to establish the link between liquidity and the duration of the SEO completion cycle. To provide support to the findings, event study methodology is employed to study the abnormal volume turnover during the pre‐SEO announcement period for firms with shorter and longer registration periods.

The paper finds that firms with greater liquidity come to market sooner. The results indicate a small yet significant effect of liquidity on the duration of the SEO completion cycle. There is also evidence that lower pre‐announcement period volume turnover is associated with a longer registration period – which has some implications for issuance costs. The results are robust to the inclusion of industry or firm effects, use of different regression specifications, and application of alternative liquidity measures.

This paper belongs to the growing literature that examines the link between liquidity and the firm's equity issuance costs. It adds to the literature by: examining the determinants of the time it takes to complete an offering; providing the evidence that liquidity may affect the ease with which investment bankers place new shares; and presenting the evidence using newer measures of liquidity based on low‐frequency data.