Cash shortage and post-SEO stock performance
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Date
2016
Authors
Chen, Qiuyu
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Abstract
In this thesis we examine the long-run stock performance of seasoned equity offering (SEO) companies. We find that SEO firms facing a short-term cash shortage when they issue new shares have poor long-run stock performance. This result is robust according to tests based on two different performance measurement methods. In contrast, the stock price reaction at the time of SEO announcement is not correlated with short-term cash need. The evidence suggests that the market does not incorporate the negative information contained in cash shortage at the time of SEO. We test alternative explanations for underperformance. We find that the long-run operating performance of SEO firms with greater cash need is similar to that of other SEO firms. Also, SEO firms with greater cash need have higher Tobin's Q at the time of issuance. This evidence suggests that the poor long-run stock performance reflects a correction of market overvaluation.
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Cash