The Impacts of Overinvestment and Financial Constraints on Seasoned Equity Offering Long-Run Performance

• Main Authors: Pei-shan Lu, Weiju Young, Meng Sung Hsieh
• Format: Article
• Language: English
• Published: EconJournals 2017-10-01
• Series: International Journal of Economics and Financial Issues
• Online Access: https://www.econjournals.com/index.php/ijefi/article/view/5241

<p>This study considers overinvestment and financial constraints as factors that associate with managerial incentives of firms conducting seasoned equity offerings (SEOs). The results show that pre-issue overinvestment and financial slack are negatively related to the long-run performance of SEO firms. It implies that SEOs of firms with these two characteristics are driven by managerial incentive misalignment, resulting in their lackluster long-run performance after SEOs. In other words, overinvesting and financially unconstrained firms may conduct SEOs due to managers' empire-building desires. These results should remind the board of directors to prevent managers' equity financing from serious overinvestment and that long-run investors should avoid buying new-issue shares of firms with overinvestment and financial slack.</p><p><strong>Keywords:   </strong>Seasoned Equity Offerings (SEOs); Overinvestment; Financial Constraints; Managerial Incentives</p><p><strong>JEL Classifications</strong>: G30, G32</p>