Cash shortfall, SEO offer size, and SEO announcement returns

Ebrahim Bazrafshan and Amine Tarazi

The European Journal of Finance, 2023, vol. 29, issue 5, 567-582

Abstract: We examine the announcement returns of 3483 seasoned equity offerings (SEOs) during the 1996–2018 period. Although there is a significant decline in SEO announcement returns, we show that cash shortfall in the year before SEO has a positive impact on SEO announcement returns. By matching SEO offers sizes and cash shortfalls, we also find that negative announcement-period returns become positive when SEO offer size is determined in concert with cash shortfall. Patterns of long-run abnormal firm performance after SEO announcements are consistent with those we document for the announcement-period returns. Our results suggest that cash shortfall in the year before SEO as indication of funds needs mitigates agency spending of SEO proceeds, and thus, the market welcomes the SEO announcement with positive stock price reactions.

Date: 2023
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DOI: 10.1080/1351847X.2022.2078666

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