Impact of use of proceeds disclosure in seasoned equity offerings : empirical evidence on how the intended use of proceeds impacts stock price returns and offer price discounts in seasoned equity offerings on the Oslo Stock Exchange

Abstract

We add to the existing research on security issues by examining the announcement effect of seasoned equity offerings on the Oslo Stock Exchange between 2005 and 2018. Previous studies report significant costs for firms attempting to raise equity and highlight the relevance of information asymmetry and agency issues between managers and investors. By distinguishing between firms raising equity for Acquisition purposes, Investment purposes, General purposes, and Refinancing purposes, we test if the disclosure of intended use of proceeds impacts the indirect costs of issuing equity. We expect firms that announce specific investment plans (Acquisition and Investment firms) to benefit from lower discounts and higher abnormal stock returns upon announcement, relative to firms that reveal no specific investment intentions (General and Refinancing firms). By running cross-sectional analyses, we find that firms announcing acquisition intentions experience no abnormal returns, whereas firms with Investment, General, or Refinancing intentions significantly underperform. These findings suggest that firms intending to use the proceeds for acquisition purposes manage to credibly signal valuable investment opportunities, and effectively remove some of investors’ suspicion of opportunistic behavior. Furthermore, we find that firms raising equity for Acquisition or Investment purposes seem to achieve lower discounts than firms raising equity for Refinancing purposes. In summary, we provide evidence for the relevancy of firms’ disclosure of intended use of proceeds as a measure of asymmetric information and agency issues in the context of seasoned equity offerings.