Determinants of Stock Price Dynamics Following Seasoned Equity Offerings on the Oslo Stock Exchange: An Empirical Analysis
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We provide evidence of a significant underperformance following Seasoned Equity Offerings (SEOs) conducted on the Oslo Stock Exchange (OSE) in the period 2000-2010. In an attempt to explain the low stock returns for SEO firms, we examine whether the market under-reacts to the negative information implicit in the SEO announcement, or if the underperformance is better explained by more rational means such as lower risk or model misspecification. Specifically, we test whether the underperformance can be explained by ex-ante mispricing and trace whether changes in risk due to decrease in leverage and higher investment level may give a better explanation of the low stock returns. Our results show that SEO firms that are considerably overvalued prior to announcement, as measured by their book-to-market ratio, experience a significantly larger decline over the three years following the issue. We also find that firms time their SEOs to periods with favorable conditions in the market when their stock is overvalued. The results are consistent with the mispricing hypothesis and inconsistent with purely risk-based explanations. Analyzing the underperformance per cohort year, we find large fluctuations in the magnitude of the abnormal returns. This pattern can be caused by the relatively higher risk of SEO firms compared to non-issuers. Although our results suggest an explanation based on mispricing, we cannot rule out all rational explanations. We therefore argue that both rational and mispricing explanations are needed to fully understand the stock price dynamics following SEO events.