Capital structure adjustment and market reaction following seasoned equity offerings

Faiza Asad, Saqib Gulzar, Kenbata Bangassa and Majid Jamal Khan

International Journal of Finance & Economics, 2020, vol. 25, issue 3, 388-411

Abstract: This paper analyzes the market reaction towards capital structure adjustment through seasoned equity offerings in the United States. It recognizes that capital structure and equity mispricing are closely associated with seasoned equity offering. We specifically propose that if the trade‐off theory holds and firms follow target capital structures, then, firms that are overlevered would effectively exploit an overvalued equity in a cost‐effective adjustment of their capital structures through seasoned equity offerings. We also test how the market then reacts to such capital structure adjustment attempts. Controlling for other motives of seasoned equity offerings in a sample of 1,725 secondary issues by 1,016 U.S. nonfinancial firms from 2004 to 2013, we found that firms that were ex ante overlevered and overvalued were more likely to announce a seasoned equity offering. As regards the market reaction to such capital structure adjustments, it is found that the market favorably reacted in both the short term and long term, as evidenced by positive 3‐day cumulative abnormal returns and buy‐and‐hold abnormal returns, respectively. Moreover, post‐event evidence suggests that on the average, overlevered firms reduced their deviations from the target and that their leverage levels mainly stayed around the targets until at least 3 years after the secondary equity issues.

Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
https://doi.org/10.1002/ijfe.1758

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:wly:ijfiec:v:25:y:2020:i:3:p:388-411

Ordering information: This journal article can be ordered from
http://jws-edcv.wile ... PRINT_ISSN=1076-9307

Access Statistics for this article

International Journal of Finance & Economics is currently edited by Mark P. Taylor, Keith Cuthbertson and Michael P. Dooley

More articles in International Journal of Finance & Economics from John Wiley & Sons, Ltd.
Bibliographic data for series maintained by Wiley Content Delivery ().