Prospectus disclosure and stock price dynamics around seasoned equity offerings : empirical evidence from the Norwegian equity market

Abstract

This paper examines the stylised facts concerning stock price dynamics around seasoned equity offerings, using a sample of 463 seasoned equity offerings made on the Oslo Stock Exchange between 2000 and 2018. We introduce the ex ante stated use of proceeds as a differentiating variable to test various branches of the capital structure theory. Our main findings emphasise the importance of asymmetric information and agency issues in equity offerings, contradicting the more rationale explanations of the well documented “new issues puzzle”. Stocks of SEO firms exhibit on average abnormal announcement returns of - 4%, with a subsequent abnormal performance of -10% per year over a three-year period. We conclude that investors systematically underestimate, but correctly show the direction of valuation effects upon the announcement of equity offerings. While we do not preclude that mispricing is a partial determining factor of the security choice, we suggest that firms choose the least costly way of financing by utilising periods where the accessibility to capital is better, which appear to be associated with overly optimistic market expectations. Furthermore, the ex ante stated use of proceeds helps to differentiate issuers with better postoffering prospects. We show that the market correctly incorporates new information revealed upon the announcement when proceeds are raised to fund specific investments. Conversely, our results indicate that the apparent timing motive generally is restricted to issuers disclosing vague investment plans or those who leave the filings ambiguous. These issuers seem to take advantage of “windows” where the investor sentiment is especially strong, and subsequently suffer from too optimistic market expectations. However, the underperformance is documented to be most severe for issuers of distressed equity, which appear to raise funds during prolonged market downturns and consequently fail to satisfactorily turn around the performance of its existing assets in place. Our findings are economically important in the sense that the disclosed information on the intended use of proceeds is publicly available upon or prior to the offerings. This means that investors can use ex ante information to get valuable insights into the future stock performance of the issuing firms.