CEO compensation and the seasoned equity offering decision

Joseph F. Brazel and Elizabeth Webb
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Joseph F. Brazel: Campus Box 8113, Department of Accounting, Nelson Hall, College of Management, North Carolina State University, Raleigh, NC 27695, USA, Postal: Campus Box 8113, Department of Accounting, Nelson Hall, College of Management, North Carolina State University, Raleigh, NC 27695, USA
Elizabeth Webb: Federal Reserve Bank of Philadelphia, Ten Independence Mall, Philadelphia, PA 19106, USA, Postal: Federal Reserve Bank of Philadelphia, Ten Independence Mall, Philadelphia, PA 19106, USA

Managerial and Decision Economics, 2006, vol. 27, issue 5, 363-378

Abstract: Empirical research on seasoned equity offerings indicates that the decision to make an SEO typically engenders a decline in firm value, as investors interpret this decision as a signal of poor financial health or that the stock is overpriced. Here, we add to the literature by analyzing the short-term market reaction to SEO announcements and the chief executive officer's link to firm performance (i.e. the proportion of CEO equity-based compensation). Results support the hypothesis that investors are more likely to view the announcement of an SEO as a last resort source of capital when the proportion of CEO equity-based compensation is high. In such cases of high equity-based compensation, our findings indicate that the SEO announcement provides an incremental signal of financial distress above that provided by financial statements. We also find this relationship (last resort signal) to be stronger when large information asymmetries exist between management and investors. Thus, managers should consider the ramifications of executive compensation structure when considering whether to make an SEO. Copyright © 2006 John Wiley & Sons, Ltd.

Date: 2006
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Persistent link: https://EconPapers.repec.org/RePEc:wly:mgtdec:v:27:y:2006:i:5:p:363-378

DOI: 10.1002/mde.1268

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