IPOs and SEOs, real investments, and market timing: Emerging market evidence

Kavita Wadhwa; V. Nagi Reddy; Abhinav Goyal; Abdulkadir Mohamed

doi:10.1016/j.intfin.2016.05.007

IPOs and SEOs, real investments, and market timing: Emerging market evidence

Kavita Wadhwa, V. Nagi Reddy, Abhinav Goyal^*, Abdulkadir Mohamed

^*Corresponding author for this work

Finance

Research output: Contribution to journal › Article › peer-review

9 Citations (Scopus)

Abstract

This study uses market-to-book ratio decomposition to examine whether firms that issue equity through initial public offerings or seasoned equity offerings exploit mispricing because of investor enthusiasm or to finance growth opportunities. We find strong evidence that, on average, firms do not issue mispriced stocks to exploit investors but, rather, to finance their investment opportunities in the form of real assets, inventory, and capital expenses. Firms that issue overvalued stocks with the view to increase their cash holdings experience poor long-run performance. Overall, our results show that stock mispricing drives equity offerings through IPOs and SEOs. Nonetheless, high transparency and balanced regulation in the marketplace deter issuing firms from investing their proceeds in non-value-creating activities. This evidence is robust to alternative measures of valuation and long-run performance.

Original language	English
Pages (from-to)	21-41
Number of pages	21
Journal	Journal of International Financial Markets, Institutions and Money
Volume	45
DOIs	https://doi.org/10.1016/j.intfin.2016.05.007
Publication status	Published - 1 Nov 2016

Bibliographical note

Funding Information:
We appreciate helpful comments from Jeff Harris, Ram Kumar Kakani, Olan Henry, Vasileios Kallinterakis, Vijaya Marisetty, John Polonchek, Madhu Veeraraghavan, Raja Velu, and participants at the Ninth Capital Market Conference at the Indian Institute of Capital Markets, Mumbai (December 2012) and the Fifth India Finance Conference at IIM Calcutta (December 2015). We thank Professor Chris Veld, the handling editor of our paper, for his feedback and suggestions in improving the revised draft. We are grateful to the authors’ respective institutions for financial support. We are responsible for all remaining errors.

Publisher Copyright:
© 2016 Elsevier B.V.

Keywords

Investment funding
IPOs
Long-run performance
Market-timing
Market-to-book ratio
Residual income model
SEOs

ASJC Scopus subject areas

Finance
Economics and Econometrics

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Cite this

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title = "IPOs and SEOs, real investments, and market timing: Emerging market evidence",

abstract = "This study uses market-to-book ratio decomposition to examine whether firms that issue equity through initial public offerings or seasoned equity offerings exploit mispricing because of investor enthusiasm or to finance growth opportunities. We find strong evidence that, on average, firms do not issue mispriced stocks to exploit investors but, rather, to finance their investment opportunities in the form of real assets, inventory, and capital expenses. Firms that issue overvalued stocks with the view to increase their cash holdings experience poor long-run performance. Overall, our results show that stock mispricing drives equity offerings through IPOs and SEOs. Nonetheless, high transparency and balanced regulation in the marketplace deter issuing firms from investing their proceeds in non-value-creating activities. This evidence is robust to alternative measures of valuation and long-run performance.",

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IPOs and SEOs, real investments, and market timing: Emerging market evidence

Abstract

Bibliographical note

Keywords

ASJC Scopus subject areas

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