The Impacts of Overinvestment and Financial Constraints on Seasoned Equity Offering Long-Run Performance

Pei-shan Lu, Weiju Young and Meng Sung Hsieh
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Pei-shan Lu: Department of Accounting, Chaoyang University of Technology, Taichung, Taiwan,
Weiju Young: Department of Accounting, Chaoyang University of Technology, Taichung, Taiwan
Meng Sung Hsieh: Department of Finance, Feng-Chia University, Taichung, Taiwan.

International Journal of Economics and Financial Issues, 2017, vol. 7, issue 5, 216-224

Abstract: This study considers overinvestment and financial constraints as factors that associate with managerial incentives of firms conducting seasoned equity offerings (SEOs). The results show that pre-issue overinvestment and financial slack are negatively related to the long-run performance of SEO firms. It implies that SEOs of firms with these two characteristics are driven by managerial incentive misalignment, resulting in their lackluster long-run performance after SEOs. In other words, overinvesting and financially unconstrained firms may conduct SEOs due to managers' empire-building desires. These results should remind the board of directors to prevent managers' equity financing from serious overinvestment and that long-run investors should avoid buying new-issue shares of firms with overinvestment and financial slack.

Keywords: Seasoned Equity Offerings (SEOs); Overinvestment; Financial Constraints; Managerial Incentives (search for similar items in EconPapers)
JEL-codes: G30 G32 (search for similar items in EconPapers)
Date: 2017
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