Seasoned Equity Offerings, Market Timing, and the Corporate Lifecycle

Seasoned Equity Offerings, Market Timing, and the Corporate Lifecycle

by Harry DeAngelo* Linda DeAngelo* René M. Stulz* February 2008 Revised April 2009

Abstract This paper gauges the importance of market timing for the decision to conduct a seasoned equity offering by testing whether SEO decisions are better explained by timing opportunities or by a simple fundamentals-based theory in which firms sell stock primarily in the early stages of their lifecycle, when growth opportunities exceed internally generated cash flow. We measure timing opportunities using market-to-book ratios and prior and future stock returns (and other equity mispricing proxies advanced in the literature), and lifecycle stage by the number of years listed. Both timing and lifecycle proxies have a significant influence, with the lifecycle effect quantitatively stronger, but neither adequately explains SEO decisions because (i) a near-majority of issuers are not growth firms, and (ii) the vast majority of firms with high M/B ratios and high recent and poor future stock returns fail to issue stock. Since a full 62.6% of issuers would run out of cash by the year after the SEO without the offer proceeds (and 81.1% would have subnormal cash balances at that time), we conclude that a near-term cash need is the primary SEO motive, with market-timing opportunities and lifecycle stage exerting economically significant ancillary influences on the SEO decision.

* We thank Malcolm Baker, David Denis, Espen Eckbo, Eugene Fama, Tim Loughran, Oguzhan Ozbas, Jay Ritter, Berk Sensoy, Randolph Westerfield, Jeffrey Wurgler, and three anonymous referees for helpful comments. We are grateful to Tim Loughran and Jay Ritter for making their sample of seasoned equity offerings available to us. We have benefited from the superb research assistance of Min Kim, Rose Liao, Roger Loh, Taylor Nadauld, Carrie Pan, Jérome Taillard, and April Xu. hdeangelo@marshall.usc.edu or ldeangelo@marshall.usc.edu or...