Investor recognition and seasoned equity offers

• Published in: Journal of corporate finance (Amsterdam, Netherlands) Vol. 25; pp. 216 - 233
• Main Authors: Autore, Don M., Kovacs, Tunde
• Format: Journal Article
• Language: English
• Published: Amsterdam Elsevier B.V 01-04-2014; Elsevier Science Ltd
• Subjects: Business valuation; Equity; Investments; Investor recognition; Portfolio performance; Post-issue stock underperformance; Predictions; Seasoned equity offers; Stock offerings; Studies; Underwriting; Underwriting costs; Investor recognition; Underwriting costs; G32; G24; G14; Seasoned equity offers; Post-issue stock underperformance
• ISSN: 0929-1199; 1872-6313
• DOI: 10.1016/j.jcorpfin.2013.12.002

We find that seasoned equity issuers who pay more in underwriting costs are associated with larger improvements in investor recognition, greater contemporaneous increases in firm value, and larger declines in illiquidity risk. We identify increased analyst following as an important channel through which these effects occur. The results are consistent with the prediction of Merton (1987) and imply that an equity issuing firm can actively manage its degree of investor recognition and thereby influence its valuation. Furthermore, equity issuers associated with greater improvements in investor recognition exhibit significantly more negative multi-factor alphas during the three years after issuance, suggesting that improved investor recognition can partially explain the appearance of post-issue stock underperformance.
•Seasoned equity issuers who pay more in underwriting costs are associated with•Larger improvements in investor recognition•Greater contemporaneous increases in firm value•Larger declines in illiquidity risk•Improved investor recognition partially explains post-issue stock underperformance.