38Do Firms Time Seasoned Equity Offerings

Electroniccopyavailableat:=1117281DoFirmsTimeSeasonedEquityOfferings?EvidencefromSEOsIssuedShortlyafterIPOsYiJiang**HenryB.TippleCollegeofBusiness,UniversityofIowa,IowaCity,IA,52242(319)[e-mail]:July2008Abstract:Iexaminewhetherfirmstakeadvantageoftransitorywindowsofopportunitytotimeseasonedequityofferings(SEOs).IfindfirmsthatexperiencelargerIPOunder-pricing,largerstockpricerun-upsaftertheIPO,higherTobin’sQandgreatercapitalexpenditurestendtoreturntothemarketwithanSEOearlierthantheothers.FirmsissuingSEOswithinsixmonthsofIPOsearn0.74%lowerthree-dayannouncementexcessreturnsthanthoseissuingmorethansixmonthsofIPOs.Firms’three-yearbuy-and-holdabnormalreturnispositivelyrelatedtothelogarithmofthetimebetweenIPOandfirstSEO.FirmsissuingSEOsshortlyafterIPOsalsoexhibitworseoperatingperformance.AdditionalresultssuggestthatinvestmentratesarenothigherinfirmsissuingSEOsshortlyafterIPOs.Ingeneral,IdocumentmoresevereunderperformanceoffirmsconductingSEOswithinsixmonthsofIPOs.Theresultsaremostconsistentwiththehypothesisthatmanagerswithprivateinformationtimetheequityissuesinwaysthatbenefitexistingshareholders.JELclassification:G14,G34,G32.Keywords:Seasonedequityoffering;Initialpublicoffering;Markettiming;MarketfeedbackIthankMattBillett,PhilipDavies,JonGarfinkel,ErikLie,YiminQian,AshishTiwariandAnandVijhforhelpfulcommentsandsuggestions.Allerrorsaremyresponsibility.Electroniccopyavailableat:=11172811I.IntroductionAftertheinitialpublicoffering(IPO),firmsmaydecidetoraiseadditionalcapitalbyissuingseasonedequityoffering(SEO).Interestingly,somefirmsreturntotheequityissuemarketwithSEOmuchsoonerthantheothers.Forexample,Google,Inc.conductedIPOonAug.19,2004at$85pershare.Lessthanayearlater,Google,Inc.raised$4.18billioninasecondaryofferingatthepriceof$295pershare.Thismotivatesmetoexaminethefollowingresearchquestion:WhydosomefirmsthatjustconductedtheirIPOsdecidetoconductanotherroundofequityofferings,knownasSEOs,rapidlyaftertheirIPOs?Oneexplanationismarketfeedback.MarketfeedbackreferstothehypothesisthathighstockreturnsaftertheIPOsignalthatthemarginalreturntotheprojectishigh,which,inturn,encouragesmanagerstoincreaseinvestmentbyraisingadditionalcapital.Jegadeesh,WeinsteinandWelch(1993)findfirmsthatthatexperiencelargerpost-IPOreturnstendtoissueSEOswithinthreeyearsoftheirIPOsandtheirSEOsarelarger.Theyinterprettheirresultsasconsistentwiththemarketfeedbackhypothesis.Thereisanotherexplanation:firmsissueSEOshortlyafterIPOtoexploitmarkettimingopportunities.Accordingtothemarkettiminghypothesis(MyersandMajluf(1984)),stockofferingsaremotivatedprimarilybymanagers’desiretotakeadvantageofan“openfinancingwindow”tosellover-valuedequity.Itestandfindsupportforthemarkettiming/overvaluationhypothesisinexplainingfirms’seasonedequityissuedecisionsshortlyaftertheirIPOs.Whileearlystudieshaveimprovedourunderstandingofcorporateequityissuedecisions,veryfewofthemhaveviewedtheissuefromtheperspectiveofthetimebetweenIPOandthefirstSEO.ThispaperattemptstofillthisvoidbyfocusingonagroupoffirmsthatreturntotheequityissuemarketshortlyaftertheirIPOs.Specifically,mystudybuildsonthedifferencesinthelengthoftimesinceIPOatthedateofSEO.ThispaperdiscussesboththemarketfeedbackandmarketovervaluationexplanationsandconductfurtherinvestigationofthemotivationandconsequencesofthetimingbehaviorofSEOfirms.2MyfocusonSEOsissuedshortlyafterIPOsismotivatedbyseveralconsiderations.First,firmsissuingSEOsshortlyafterIPOsareanimportantgroupoffirms.MyempiricalresultssuggesttheSEOanomalyisstrongerinthissetoffirms.Thisspecialgroupoffirmsprovidesuswithadirectwaytotestfirm’smotivationtoissueSEOs.Specifically,Iaddressthefollowingresearchquestions:1)WhydofirmsdecidetoconductSEOsrapidlyafterIPOs?Isitduetogoodinvestmentopportunities,orisitbecausethesefirmsaretimingequityissuesinwaysthatbenefitexistingshareholders?2)HowdoesthemarketreacttotheannouncementofSEOsrapidlyafterIPOs?3)Whatisthelong-runstockpriceperformanceoffirmsconductingSEOsshortlyafterIPOs?4)Whatistheoperatingperformanceofthesefirms?5)Dothesefirmshavehigherinvestmentsrates?AthoroughstudyofthegroupoffirmsthatreturntotheequityissuemarketshortlyafterIPOswillprovideuswithadditionalevidenceastowhetherfirmstimeequityissuesornot.MysecondmotivationforexaminingthegroupoffirmsthatconductSEOsshortlyafterIPOscomesfromtheresearchstudybyJegadeesh,WeinsteinandWelch(1993)1.Theyfindthatfirmswithlargerpost-IPOreturnsaremorelikelytoissueSEOswithinthreeyearsofIPOs.Althoughtheyfindsomesupportforthesignalinghypothesis,theyinterprettheirresultsasmoreconsistentwiththemarketfeedbackhypothesis.Whiletheyhavedoneaniceevaluationofsignalingversusmarketfeedbackhypothesis,theyoverlookanalternativehypothesisthatmayaccountforfirms’decisiontoconductSEOsshortlyafterIPOs,namelytheovervaluationhypothesis.Moreover,theSEOannouncementeffectspresentedinTable9oftheirpaperdonotsupportforthemarketfeedbackhypothesis.Insteadofusingalongwindow(three-year),ashortwindow(sixmonthorless)maybemorelikelytocapturefirm’sequityissuede