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Firm age, idiosyncratic risk, and long-run SEO underperformance

Chia-Wei Huang, Po-Hsin Ho, Chih-Yung Lin and Ju-Fang Yen

International Review of Economics & Finance, 2014, vol. 34, issue C, 246-266

Abstract: Post-issue stock underperformance is driven, at least in part, by young issuers with contemporary decline in idiosyncratic risk (proxied by expected idiosyncratic volatility) exposure. We show that the SEO long-run underperformance primarily occurs in young issuers. The intuition is that young firms generally have greater uncertainty about their future profitability due to greater intangible growth options. Therefore, when young firms finance investment from SEO proceeds, this uncertainty could be resolved because growth options are converted into assets in place, leading to a larger reduction in idiosyncratic risk than their matched non-issuers suggest. Furthermore, there is no evidence of post-issue stock underperformance and abnormal decline in idiosyncratic risk for mature issuers, supporting the growth option perspectives.

Keywords: Firm age; Idiosyncratic risk; Growth option; Long-run performance; Seasoned equity offerings (search for similar items in EconPapers)
JEL-codes: D83 G12 G32 (search for similar items in EconPapers)
Date: 2014
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DOI: 10.1016/j.iref.2014.08.009

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