Market feedback and classification of market timing SEOs

Abstract

We posit that the market’s response during the registration period influences issuers’ decisions about their SEOs. In line with our proposition we develop a parsimonious ex ante measure that successfully separates stock offerings designed to time the market (Regular SEOs) from those used to fund investments or for general corporate purposes (Improved offers). Improved seasoned equity offerings, whose dollar offer size exceeds the amount filed initially at registration, record a significantly positive price reaction on the offer date and do not underperform their benchmark in the post-issuance period. Conversely, Regular offers underperform in both instances. The return difference between the two SEO groups amounts to 0.7% per month in the two-year post-issue period. Further, Improved SEO firms generate stronger institutional demand around offerings and make higher investments following their offers compared to Regular SEOs.