Optimal investment and long run underperformance of SEO

Transcription

1 Opimal invesmen and long un undepefomance of SEO bsac This pape use a eal opion model based on aional picing o explain he sylized eun aound seasoned equiy offeing SEO by opimal invesmen saegy. Manages ime he mae o execise is gowh opions only when he value of he opion becomes lage enough. onsequenly, pices always un-up befoe issues and euns is low afe wads o eflec he deceasing in fim s sysemaic isiness. The inoducion of ommimen-o-inves ino he model helps o educe he isiness gadually afe SEOs. Simulaed daa sugges ha wih easonable paamee values he model can geneae euns maches many fuues of eal daa.

2 Ouline of onens. Inoducion. Real Opion Models. ims Technology, Gowh Opions and Demand Dynamics. ims alue and Opimal Invesmen 3. Implicaions of he model 3. Paamees wih opimal invesmen plan 3. Ris changes wih 3 faco model 3.3 ommimen o Inves: 4 faco model 4. Empiical nalysis 4. Long Run Reuns BHR by Saed Pupose fo Poceeds. 4. Invesmen faco and 4 faco picing model 5. onclusion

3 . Inoducion In he baseline seing of copoae finance, pojecs ae execued if hey have a posiive ne pesen value NP. Howeve, when pojecs can be posponed, ne pesen values become insufficien o deemine he opimal invesmen saegy, because manages can wai fo moe favoable mae condiions o issue new secuiy. Those pojecs ha can be imed o inves become gowh opions of fims. Thee ae many pevious sudies use he eal opion model o explain specific eun scenaios aound diffeen copoae evens. nd my wo will nes in he lieaue ha elaes SEO long un unde pefomance o eal invesmen. alson, ishe, and Giammaino G 6 develop a compehensive eal opion heoy of SEO episode euns assuming asymmeic infomaion. This heoy is boadly lined o conibuions by Be, Geen, and Nai 999, Bennan and Schwaz 985, alson, ishe, and Giammaino 4, oope 6, Gomes, Kogan, and Zhang 3, Kogan 4, Li, Livdan, and Zhang 7, Lucas and McDonald 99, McDonald and Siegel 985, Paso and eonesi 5, and Zhang 5. Those wos ague ha an opion o gow he company hough execuion of he pojec is a leveed claim. The equied eun on a leveed claim is highe han he equied eun on an unleveed claim on he same asses. Execising he eal opion, i.e., maing he invesmen necessay o sa he pojec unleves he claim. Thus, when fims gow hey conve eal opions ino asses in place. The asses may be isy, bu an opion on hese asses is even Gaham and Havey pesen suvey evidence ha suggess manages ae concened abou he appopiae iming of equiy issues. Real opions model ae applied fo euns in M&, soc splis, soc epuchase.

4 isie. Those models can pedic a paen of soc eun ha consisen wih empiical finds 3. The abnomal low eun does no happen because he SEO is imed, bu ahe because hee has been a fundamenal shif in he isiness of he fim s asses. The model I will use in his wo is closely elaed o models in G 6. Howeve, while he model in G 6 impose asymmeic infomaion beween manages and invesos o geneae gadually shifed long un abnomal eun, he model in his wo geneae eun dynamics simila o he empiical esuls wihou imposing esicion on infomaion updaing. The ic is o eplace a single peiod invesmen plan o long un pojecs, which geneaes exa iss ha disappea wih ime. Invesmen pojec can impose addiional invesmen equiemen ha canno be waived o posponed. This commimen of invesmen can incease fim s iss. Because he cash inflow pofi of fims is isie han he cash ouflow commimen o incease he invesmen in a peiod of ime. Inoducing commimen ino invesmen aangemen, implies ha ohe han mae eun, size, and boo o mae, a fouh faco ha coelaed wih he cos of he commimen is needed o explain cosssecional undepefomance of euns afe SEOs. The main body of he pape will be oganized as follow: In secion, I will define a gowh opion model unde efficien mae hypohesis, chaaceize he opimal invesmen policy and implied is dynamics of he fim aound SEO evens. Secion 3 discusses all he implicaions of he model, especially hose elaed o long un unde-pefomance of he socs. 3 Rie 3 based on a lage lieaue, summaizes ha socs on aveage have 7% pices un-up one yea pio o issuance, a -% negaive announcemen eacion and -7.6% abnomal eun fo a five yea buy-and-hold pofolio

5 Then in secion 4, I will use eal daa o es some of he implicaions. Secion 5 using simulaed mehod of momens o calibae paamees of he model.. Real Opion Model. ims Technology, Gowh Opions and Demand Dynamics o simpliciy assume hee ae wo ypes of opions j {, N}. Opions of ype means afe he iniial invesmen, fo a fixed ime in he fuue, he fim commied o inves addiional amoun, while ype N opions need only one full invesmen. im can spend λ o conve a o N ype opion ino an invesmen pojec. ollowing he model of alson, ishe, and Giammaino G, 6 im s poducion aciviy can be summaized as follow: n all equiy fim poduce accoding o: P Q whee, Q is he insananeously oupu ae, is an exogenous sae vaiable following: d g d σ dz, z is a sandad Bownian moion, and g and σ ae dif and sandad deviaion of he gowh ae., all fims sa wih insalled capial level, and poduce wih sicly inceasing poducion funcion Q Q K. Le be he poin of ime he fim execises is gowh opion.

6 The invesmen decision afe execising a ype opion will consis of wo pas. is, invess a lumpy up-fon cos λ such as consucion down paymens o building design cos a ime, hen inves a coninuous invesmen flow a a gowh ae duing ime [, T ]. Theefoe, he capial level of he fim wih a ype opion can be summaized by K e υ if < if T if > T 3.c Whee, I, e υt fim execises a ype N opion a will has capial levels as: K if if < 3. n ims will lose hei gowh opion andomly and he sopping ime s follows an exponenial disibuion wih paamee ρ, whee j is he index fo ypes of gowh opion. Le, j Y if if < s s be he indicao funcion fo losing an gowh opion, hen he uncondiional sopping ime of a specific opions is exp ρ j. fim ae moe liely o lose is gowh opion if ρ is big. The exisence of poenials o lose he opion is no essenial in he basic seup, bu will help when fims have moe han one opion a a ime.. ims Ininsic alue a Diffeen Life Sage and Opimal Invesmen

7 ssume manage of he fim have full infomaion of ypes of opions i have in hand. nd acing in favo of cuen shaeholdes by maximizing fim s ininsic value, defined as he pice ha will be paid by a compeiive maes ha has access o he same infomaion as he manages. Theefoe, he model ules ou all possible conflics beween manage s and cuen shaeholdes. The manage chooses o maximize he ininsic value of he fim by choosing invesmen policy D and poducion Q. max s { e [ P Q ds λ D Q, D, s s s s ] } Whee, is a fixed cos ha assume by now popoional o fim s capial level. Theefoe, he ininsic value of he fim will be a funcion of, Y, K, and j. Le i{,,} be he indexes of he life sagecapial level of he fim.. Then ij, Y will explicily ecognize his dependence. Noice ha he opeaing evenue QP Q Q is inceasing in oupu, and no maginal cos assumed in his model. im s opimal poducion plan is o poduce a full capaciy. This assumpion is essenial o mae sue hee exiss a closed fom soluion fo he opimal invesmen saegy. New invesmen need ime o gain is full capaciy, and oupu level is summaized by Q K b K K K if < if if > j j j T j T 4 bove seing adaped o he ime o build assumpion of an invesmen by inoducing b ino he model. Invesmen will no be able o poduce a full capaciy immediaely. nd paamee

8 b capues he wase of low poduciviy. o simpliciy, T is assuming o be consan acoss diffeen ype of gowh opions. Ohe plausible seings is a ype N opion may have a smalle T, since he company ge all he invesmen a one ime, so moe flexible have moe fee cash o aange addiional cos afe he down paymen. Now, I will move on o calculae he value of fims a diffeen life sage. fim had compleed is expansion a ime will have is value equals he asses value a hands only. 5, Q Q N im had execised is gowh opion bu did no complee he whole pocess, will have diffeen cuen value. Because execising diffeen ypes of opions can geneae discepancies of capial level ove ime peiod ], [ T, hus will geneae diffeen cash flows and opeaion coss. Le D be he indicao funcion ha fim execises is gowh opion and be he indicao funcion ha he ype of invesmen plan he fim had execised is invesmen wih commimen in he fuue. The value of a pemaue fim ha execised an opion wihou commimen is, } ] exp[ {,, 6. } ] exp[ {,,, T b whee ewie n T b D b N N

9 The fis wo ems in fis line of 6, n is jus he value of a maue fim, and he las em is a measue fo he cos of ime o build denoed as b. nd his cos b deceases wih ime and disappeas afe T. To simplify expessions in his wo, define } exp{ T x x Γ. pemaue fim ha execised a ype gowh opion a will have a value: b e e b e b e Whee c b e e e b e D,, 6. } { } {,,,,, Γ Γ Γ Γ Γ Γ Γ Γ Γ Γ Γ Γ Γ Γ λ λ υ υ υ υ υ υ υ υ, capues changes of all fuue evenues when execise he opion a. measues value of coss geneaed by incemen of invess. om 6,n and 6,c, he opimal invesmen decisions and gowh opion value befoe execising can be chaaceized as following: Poposiion : he opimal invesmen saegy 4 4 Dixi and Pindyc 994 poves he esul in hei boo. See appendix fo a sho poof. fo a juvenile fim i facing an opion wih commimen o inves is

10 / / / x,,, ε λ B K K,,, Y x Q Y ε 7,c /,, λ ε σ σ ρ σ B and whee Poposiion : he opimal invesmen saegy fo a juvenile fim facing an opion wih no commimen o inves is,,,, / / x,, N λ λ ε σ σ ρ σ ε ε λ N N N N N B and whee Y x Q Y B K K 7,n a wedge which always values moe han, and can each values such as o 3, fo eal paamees, and inceases wih he economic unceainy.

11 im will execise hei gowh opions when he sae vaiable x fo he fis ime. ompae esuls in 7, c o he esuls in G 6, x is bigge, since he commimen cos moivae he fims o wai longe. 3. Implicaions of he Model 3. Paamees wih opimal invesmen Befoe I poceed o calculae implied eun dynamics of he model, i will be helpful o examine he invesmen policy in 7,n and 7,c in moe deail. Recall ha he NP of an immediaely execised opion can always be wien in he fom of NP B fo boh ypes of gowh opions 5. nd, he opimal invesmen policy and opion value will especively be B B x and G B f x ς Remembe, > 6 is a funcion of ρ,, σ, and inceasing in ρ,, deceasing in σ. lso, ρ did no affec he value of o B. To see his easily, noice ha ρ only conols how easily he fim can lose is gowh opion and he disibuion of Y is independen fom all ohe vaiables in his model. So wo fims diffe only by is ype diffeen ρ will have idenical expessions fo and B. When σ is small, is big, and x is small. less volaile sae vaiable of he mae, mae he manage moe willing o execise a gowh opion. When is high, he opion is moe isy in a sense ha he convexiy of he opion value is big. 5 See ppendix and fo a poof. 6 See G 4 fo a poof.

12 In he seups, -g, whee g is he consan dif of x unde he is neual measue and is he is fee ae. When g is big, is small and is big. Howeve, will also affec he value of and B as a discoun faco o pa of he discoun faco fo diffeen coss and evenues. Howeve, fom expessions 6,c, 6,n, 7,c and 7,n, B does no be affeced by, and is sicly deceasing in in boh ypes of opions. So x is inceasing in and deceasing in g. possible eason fo hese elaionships is a smalle g maes he dynamics of moe slowly in a sense ha on aveage i aes moe ime fo o each a ceain value. Now, I will go on o compae he value of diffeen gowh opions. / ζ ζ ζ ζ ε B B x x G Recall ha λ B N, λ Γ Γ Γ b B and / } { /, K K K b K K N Γ, /, b K b K Γ Γ Γ 9 To mae he calculaion easy, assume no opeaion cos and no ime o build, hus, b. Then

13 B λ, B λ N Γ Γ K K, N fe nomalize ln G ln G N ζ ln ln N ζ ln B ln B N Noice ha fo a ype opion, as T inceasing we need o educe o mae he final capial level equals K. nd he change of values is deived fom boh changes in v and T. So i is no clea a his poin how and B changes wih T. I will leave his o he nex secion when I simulae daa using diffeen values of paamees. When he opion is ype N, B is no affeced by change of T, and is deceasing in T hough ime-o-build. om 7,n, i is clea ha x is inceasing in T and G is deceasing in T. T is a measue of ime o wai befoe new capial can be fully poducive. Lage T is simila o imposing he assumpion ha fims being hi by a moe pesisen negaive poduciviy shoc, which educe fims cash flow as long as he effecs of shocs did no vanish. This will educe he value of he fim and he value of he gowh opion. When T is lage, he gowh opion is less aacive o manages, wih all ohe paamees equal, manages pospone he invesmen plan. Now I will move on o analysis he implied eun and iss of a fim. 3. Riss Dynamics wihou ommimen o Inves: 3 aco Model.

14 ssume invesos ae aional and no asymmeic infomaion beween invesos and manages. The mae value hen is jus fim s ininsic value. Wih all he esuls deived in secion. 7, define β cov /, / / σ d d 8. Then a geneal fom of bea fo fim can be summaized as β G jθ ij, G i, j ijθ, ζ β β ijθ. ijθ. Wihou commimen o inves, execise gowh opion immediaely changes bea by β G iθn, β θn, β θn, β θn, ssume fis hee is no opeaing cos. Recall poposiion, fim execise is gowh opion when he value of he opion is sufficienly lage when he sae vaiable fis ge close ζ enough o he opimal invesmen bounday x. om, G λ / ζ λ / ζ, he ζ x opion is execised when he value of he opion fo he fis ime each he bounday x. 7 See G 6, fim s value can be dynamically eplicaed by changing weighs in a pofolio of a is fee bonds B and a mae pofolio eun M, whee he mae pofolio euns as a dynamic ha is pefecly coelaed wih he pecenage change in he demand sae vaiable. The mae pofolio and he bond help o define a is-neual measue, unde which he bea of he fim is deemined by he weighs of M and B in he hedging pofolio. 8 See alson 4 poposiion fo deails.

15 lso noice ha β G G G ζ Q Q Q Q ζ 9. This size of dops of iss fom Q execising an opion is deceasing in fims iniial size also aios of capial levels Q. nd his is consisen wih findings fom pevious lieaues ha he size of undepefomance is lage fo small fims. lso, if wo fims ae of he same size a saing, he fim ha inceases is capial level lage han he ohe will have less isiness dops fom expansion. Theefoe, in he daa, we should expec o see a negaive coelaion beween size of poceeds in SEO and size of long un undepefomance. Howeve, if we include opeaion leveage, i will educe he size of he deceasing in fims isiness because < in he model. By assumpion is a linea funcion in capial level, aios of opeaional cos ove asse value only ae consan when we have consan o scale. The lage he value of he gowh opion elaive o value of asses in hand, he less abnomal euns we should expeced afe issuance. ssume no asymmeic infomaion, hen value of fim is he mae value of a fim and value of asse a hands is he boo value. If fim ae same in size, hen he fim wih a low boo-o mae aio gowh fims, have a bigge dops of bea a expansion. This can help o explain why people mach issues wih non issues by size and boo-o-mae aio. To summaize, wih no commimen o inves, fim s isiness deceases moe when fim s size is small. fe 9 Wihou opeaion leveage, he size of bea on gowh opion deceasing in iniial capial.

16 conol fo size, boo o mae can help o span he isiness changes caused by diffeence in opeaion leveage. 3. ommimen-o- Inves : 4 faco model Wih one peiod invesmen and mae efficiency, he eal opion model implies a shap dop of isiness of fim a he ime of expansion. Howeve, his will no be able o explain he documened long-un undepefomance afe SEOs. In his secion, I will show why he inoducion of commimen o invesmen assumpion can geneae a gadually shif of fim iss. To see his, I will fis chaaceize he bea of fims wih a ype opion. Wih commimen o inves, he bea of a fim becomes: β G jθ jθ, ij, G i, j ijθ, ζ β β β ijθ. θ,. ijθ. Theefoe, he immediaely change of isiness is G β β β β β 3,,,, is, wih no opeaion leveage, all beas on dop ou of 3. The immediae educion in isiness caused by changing opions o asses in place is weaened by iss geneaed by commimen inves. ommimen o invesmen bea deceases o zeo a he end of expansion when fims capial eaches K. To calibae he size of he change, assume b, no ime o build. Then

17 4 /, Γ Γ ζ ζ ζ ζ ζ β K G G G G G G G Simila as in no commimen o invesmen case, G β, inceases wih K and K and deceases in K. v v K v v v v v v c Γ Γ Γ Γ Γ Γ Γ Γ, λ ζ λ λ λ β 5 om 4, β inceases wih λ when eveyhing else equal; and deceases wih K. So is deducion fom execising a eal opion is educed by commimen o inves consain and he size of he effec inceases wih he value of he commimen. Subsiuing 4 and 5 bac in o 3, i is clea ha β, deceasing in K and λ. The agumen when adding opeaion cos is simila o he no commimen case. So wih commimen o inves, an addiional faco will be needed o couning on he coss of commimen. fim need o pay a hie capial ae a issuance will have a subsequence lage undepefomance afe conol size and boo o mae. Lyandes, Sun, and Zhang 8 show ha a long-sho pofolio based on

18 invesmen aings gives a piced faco ha helps o educe SEO undepefomance. I will es on his and ohe possible poxies fo capial cos λ in he empiical secion. 4 Empiical nalysis Based on discussions in secion 3, I will es he implicaion of he model wih eal daa. To do his, fis I need o consuc pofolio of issues and mached non-issues a calenda dae. 4. Daa and Buy-and-Hold bnomal Reuns The eal opion model wih commimen o inves implies ha issues will have lowe euns compaed o hei size, boo-o-mae mached non-issue fims. nd he abnomal low eun is caused by a dop in sysemaic is. The size of he abnomal eun should be inceasing in fim size and boo o mae aio, and deceasing in cos of new capial. ll he secuiy issuance daa ae downloaded fom he SD New Issues daabase. I includes all public issues aded on NYSE, ME, o Nasdaq by U.S. companies ha ae no coded as IPO s, uni issues, DR s o DS s fom Januay 98 o Decembe 3. To be included, idenified issues mus mee he following cieia: The company is lised on he ene fo Reseach in Secuiies Pices RSP daily, NYSE/mex o NSDQ a he ime of he issue; he company is no a egulaed uiliy o financials ; 3 he issue is a pimay seasoned offeing offeings including any seconday shaes ae excluded; 4 he issue involves common soc only join offeings and uni offeings ae excluded; and 5 he issue is a fim commimen, undewien offeing; 6 issues no ohe ype of offeings simulaneously. Table summaizes he fequency and size disibuion of seasoned equiy offeings by yea. On aveage hee will be 3 SEOs

19 each yea, wih fewe issues a he end of 98 h and moe issues aound middle 99s. This paen coincides wih he soc mae iming. When soc mae is in bee condiion, numbe of SEO is big. This can be consideed as a effec of lowe capial cos. The second column of able is he aveage size of poceeds offeed in SEOs by yea. The size of poceeds gadually inceases in ime. Table documens saisical facs of SEOs by he saed pupose of issuance. Thee main caegoies ae consideed: Issues wih specific invesmen plans; issues fo deb epaymen o ecapializaion; 3 geneal copoae pupose manages choose o be inexplici a filling. mong all hee caegoies, GP geneal copoae pupose has he lages mae capializaion of 875 millions a yea, followed by IN Invesmen and RERecapializaion sized 3% and 45 % less especively. The mean size of poceeds inceases wih mae capializaion fom 77 in RE o 3 in GP. Howeve, RE has he highes elaive offe size of 7% while GP only has aio aound 5. The fifh line show ha IN and GP do no have highe leveage aios compaed o fims in he same indusy. This educes he possibiliy ha manages a filling ae afaid of elling uh when fim is disessed, because fims in IN and GP do no have incenives o needs o change hei capial sucue. The las line summaizes he pecenage of offes sold by he shaeholdes. ims in IN have he leas pecenage of insides selling. nd GN has he lages pecenage of seconday offeings. This can be a sign ha eihe fims ae in bad shape o fims soc pices has been ove-valued.

20 I follow common pacice and obain maches fo my sample fims on size, boo o mae. Specifically, I fom boo o mae deciles by NYSE bea poins on he day he vaiable Then fo each SEO, idenify PERMNO in he same Boo-o-Mae deciles wih issues, and no issued equiy in he pevious 5 yeas. hoose he one has closes size as a mach fo he issue. ny missing values in he mached eun in a 5 yea hoizon ae eplaced by he euns of he second bes mach. Table 3 pesens five yea buy-and-hold abnomal euns fo all issues and subgoups disinguished by he saed pupose of issuing. Simila o pevious empiical sudies, hee is a -6% abnomal eun fo all indusial issues mached on size and boo-o-mae. mong all hee subgoups, RE has he highes abnomal euns. On aveage, issues undepefom mached non-issues by 6.5% a yea fo he subsequence 5 yeas. Boh of he esuls ae significan a % level. The fims in GP has a five yea BHR-7.8, smalle han he whole sample and is significan a % level. The IN goup has an insignifican diffeence of 3% fo 5 yeas. Invesmens do affec euns if manage do no lie a filling. Recall he eal models wih single peiod invesmen geneaes no long un undepefomance, bu ahe a shaply announcemen effec. The long un undepefomance in his seing is elaed o he long un invesmen pojecs which need consecuively new invesmen unil he pojec is compleed. This long un aangemen need fim o use addiional inenal capial in a ceain peiod of fuue ime. nd his commimen can incease fims is level because i is a leveed claim. fims invesmenmen plan including commied fuue invesmen ha canno be imed, he dop of isiness of fims will depend on how much exa cos his commimen invesmen his he model imple ha In ode o es weahe invesmen ae capable o

21 explain eun dynamics, I cie a able fom Zhang 5 descibes he invesmen-o-asse and pofiabiliy among issues goups and mached goups by yea. om able 4, issues have a highe inves o asse han non-issues. nd he Z is highe han fo he whole sample peiod. The diffeence moivaes sudies o so on his new invesmen elaed vaiable. igue plo he eal disibuion of SEOs in each Invesmen-o-sse deciles. nd he numbe of SEO is inceasing in Invesmen-o-sse. To move on, I epea seps in pevious paagaph o geneae 5 yea Buy and Hold abnomal euns wih size, Boo-o-Mae and invesmen-o-asse mached fims. Table 5 summaized he 5 yea euns fo boh pofolios and he diffeence abnomal euns. The abnomal eun sill exiss wih 3 maching cieia, howeve is no significan as in cieia case. IN sill have he lowes diffeence while GP had a highe undepefomance a his ime. 4. oss-secional Reuns and aco Picing Model Real opion model wih commimen o inves implies ha one addiional faco elaed o he cos of new capial should be included o explain he condiional euns of socs afe SEO. s discussed in secion 3, a possible candidae is he invesmen aings of he fim. In his secion I will compae esuls fom PM, ama-ench hee faco model, momenum 4 faco models and invesmen aed 4 faco model. Table 7 epos he coefficiens esimaes of diffeen model coss all hee subgoups. oninue 6. Simulaion of he model

22 In his secion, we use eun dynamics epoed in pevious lieaue o calibae he model wih commimen o inves. The specific momens we see o mach ae aen fom Rie 3. These ae: fo he SEO sample an aveage eun of 7% in he yea pio o issuance; an SEO announcemen effec of %; 3 5 -yea pos-seo aveage annualized euns of.3%; and 4 aveage 5-yea annualized euns fo size and boo-o-mae maches of 4.7%. In addiion I need 5 monh eun s pio o issues of SEOS. ollow G 6, I impose he esicion f f. Wihou fixed coss, fim values ae homogeneous in q, so nomalize o q. The paamees κ and κ and κ ae no idenified by eun momens, so specify hei diffeence as λ κ κκ- κ. This consan incemen will help o idenify commimen o invesmen gowh ae. inally, he demand elasiciy does no appea cenal o eihe ou economic inuiion o he quaniaive maching of he momens above; so choose.5. The paamees, σ, and g can be elaed o long-un aveages fom financial daa. ollow pevious lieaue se o.4 annually, consisen wih ime seies aveages of T-bill aes. The paamee σ is se o., consisen wih mae pofolio eun volailiy. inally, in he absence of fixed coss, se he dif g o log.3. I use he simulaed mehod of momens o esimae he hee emaining paamees, namely, he demand gowh ae μ, he lengh of commimen o inves T, and he pos-seo oupu ae q. Since we use pos-even euns of SEO fims o calibae μm, hee momens emain un-up, announcemen, and pos-even mached fim euns, and he model is exacly idenified. The basic idea of he esimaion pocedue is he same as G 6 and G6 epo a glog.3 imply an annual is pemium of 7%, which is consisen wih Rie 3.

23 summaized in he appendix. is I saed wih wo levels of b: b, no ime o buil, and b.5. s show in Table 9, based on he esuls fom he pimay calibaion, a posiive b inceasing T fom.8 o 4 and educe q fom 3.75 o 3. oninue

24 ppendix Poof of poposiion: Le NP, Q, B Q D, λ, λ denoe he value of he opion wih commimen o inves if immediaely execises, condiional on Y. The objecive is, max Eˆ [ Y s max ˆ E [ e s s e ρ s s NP NP s s, ], ] om hape 5 of Dixi and Pindyc 994, he basic esul fo he pepeual invesmen oppouniy can be summaized in he following equaions see p.4: The fis equaion shows he invesmen oppouniy value equal o a consan imes he value of implaned pojec wih a exponen which is moe han one. This exponen is a funcion of he paamees see p.5: is-fee inees ae, dividend yield o convenience yield, and he volailiy sandad deviaion of he ae of vaiaion of he pojec value. The second equaion, poins ou he opimal invesmen ule: inves if he mae value of he pojec is equal o moe han he heshold * value.

25 Poof of Poposiion : The value of a no commimen o inves gowh opion ha execises immediaely, condiional on Y, is N N B Q Q D NP,,, λ λ fe decompose he NP, he esuls will be lie in poposiion.

26 Table veage size of Poceeds each yea fo Seasoned Equiy offeings Yea Numbe of offeings veage Poceeds$ Million Toal poceedsbillions oal

27 Table Descipive saisics of SEOs by inended use of funds caegoies This able pesens descipive saisics fo 43 sample SEO issues duing 98 3 wih he saed pupose of issuing be invesmen, deb epaymen o geneal copoae pupose. These caegoies ae invesmen N 497, ecapializaion N 3, and geneal copoae puposes N 73. Mae value is he soc pice imes he numbe of shaes ousanding on he day pio o he offe. Offe poceeds equals he offe pice imes he numbe of shaes offeed. Relaive offe size equals he numbe of shaes offeed divided by he numbe of shaes ousanding on he day pio o he offe. Deb aio is he aio of long-em deb plus sho-em deb o oal boo asses, and is he yea-end figue in he yea pio o he issue. Indusy-adjused deb is he deb aio of he issuing fim minus he deb aio of he median fim in he issue's indusy. Pecenage seconday is he pecenage of oal shaes in he offeing ha ae issued by selling shaeholdes, whee he selle ahe han he fim eceives he poceeds. Sample fims ae equied o have a leas some pimay componen. Invesmen Recapializaion Geneal opoae Pupose Mean Median Mean Median Mean Median Mae alue $Millions Poceeds$ Millions Relaive offe size Deb Raio Indusy adjused deb Secondaypecenage

28 Table 3 ive Yea Buy-and-Hold abnomal euns wih Size and Boo-o Mae mached non-issues This able pesens buy-and-hold abnomal soc euns BHRs of issuing fims in elaion o mached non-issues five yeas afe he offeing. Samples ae mached on size and mae-o-boo. The fis ow displays BHRs fo all fims, and he subsequen hee ows display BHRs fo hee caegoies of fims based upon hei saed inended use of poceeds: fims whee invesmen is he saed use of poceeds; fims whee ecapializaion is he saed use of poceeds; and 3 fims whee geneal copoae puposes is he saed use of poceeds. The adjused -saisics ae based on he mehods of Michell and Sanfod. 5ys BHR % djus T-saisics ll issues *** Invesmen Recapializaion *** Geneal copoae pupose *

29 Table 4 Equiy Issues and Mached Nonissues' Invesmen-o-sse and Pofiabiliy in alenda Time, 98 o 3 This able is pa of able 8 in Zhang 5. Median values and Z-saisics associaed wih he Wilcoxon es of hese wo chaaceisics ae epoed fo he issues and maching non-issues pofolios in he fiscal yeaend pio o SEO. The null hypohesis is ha he chaaceisics of issues and nonissues ae boh dawn fom he same disibuion. Z value beween - o will fail o ejec he null. The pofiabiliy is defined as ne income befoe exaodinay iems ompusa iem 8 divided by lagged boo value of asses iem 6. nd invesmen-o-asse equals he change in goss popey, plan, and equipmen iem 7 divided by boo asses. Yea Invesmen-o sses Pofiabiliy Issues Non-Issues Z Issues Non-Issues Z veage

30 Table 5 Monhly oss-secional Regessions of Reuns ono New Equiy Shaes and Invesmen-o-sse This able epos monhly ama-macbeh coss-secional egessions of fuue soc euns ono fim- specific vaiables. Log ME is he logaihm of mae capializaion a he end of he mos ecen June. Log BE/ME is he logaihm of boo-o-mae aio whee boo equiy is fom he mos ecen fiscal yea-end. Invesmen-o-asse is he change in goss popey, plan, and equipmen iem 7 divided by boo asses. mae-iming measues elaed o new equiy shaes is consuc fom Bae and Wugle. New equiy shae is he sale of common and pefeed soc minus he puchase of common and pefeed soc, divided by he sum of he sale of deb, he change in cuen deb, he sale of common and pefeed soc, ne of he puchase of common and pefeed soc. To educe he impac of oulies, he sample is uncaed he boom and op.5% of he obsevaions fo new equiy shae. T-saisics ae epoed in paenhesis. The adjused R² ae he ime seies aveages of he adjused R² fom he monhly coss-secional egessions. logme logb/m New Equiy Shae Invesmen o sse dj_r % % %

31 Table 6 ive-yea buy-and-hold soc pecen euns BHR fo U.S. issues and size, Boo-o-mae and invesmen-o-asse mached conol fims, 98 3 The abnomal buy-and-hold euns shown in he column maed Diff epesen he diffeence beween he BHR in he Issue and Mach columns. The ows maed N conain numbe of issues. The p-values fo equal-weighed abnomal euns ae p-values of he -saisic using a wo-sided es of no diffeence in aveage five-yea buy-and-hold euns fo issue and maching fims. The invesmeno-asse aio is measued as sum of he annual changes in goss popey, plan and equipmen OMPUSTT annual iem 7 and invenoies iem 3 divided by he lagged boo value of asses iem 6. Saemen of pupose N Issue Mach Diff p ll Geneal copoae Pupose Meges and cquisiions Invesmen Refinance/deb paymen Seconday

32 Table 7 alenda Time Regessions of Long-un Soc Reuns This able pesens monhly esimaes fom egessing calenda-ime pofolio monhly euns on five facos. The facos ae ama ench 993 hee facos MKT, SMB, HML, momenum faco MOM fom aha 997 and a long-sho pofolio based on invesmen aing IR as in Lyandes, Sun, and Zhang 8. Boh equally weighed and value weighed euns ae egessed on 4 diffeen combinaion of facos. The column maed as PM is egess issue pofolio euns on he mae pofolio. The ama-ench is he sandad hee faco model. nd daa ae fom ench s daa libay. 4-faco add mom as an addiional faco; while 4 faco eplace mom by IR. ollowing Michell and Sanffod, he alpha is adjused by expeced alpha, which is esimaed as he mean alpha fom calenda-ime pofolio egessions wih andomly seleced non-issuing fims ha ae in he same size/boo-o-mae goup as he sample fims. PM M-RENH 4-TOR 4-TOR ll Issuances Equally weighed alue weighed Equally weighed alue weighed Equally weighed alue weighed Equally weighed alue weighed LPH -.389* MKT.6***.5.7***..8***..***.7.9***..3***.9 SMB.9***.4.88**.5.8***.5.77***.6.6***.5.67***.5 HML -.4** ***. -.**.8 -.4*** *** ***.4 MOM -.4***.4 -.5***.4 IR -.3** **.3 dj_r

33 Table 7oninued Invesmen Equally Weighed alue Weighed Equally Weighed alue Weighed Equally Weighed alue Weighed Equally Weighed alue Weighed lpha MKT.***.6.33***.7.***.9.7***.8.37***..6***. SMB.***.9.93***..9***.8.96***.6 93***.7.87***.7 HML -.***.7.**. -.3** ***. -.44***.9 -.4***.8 MOM -.53***.7 -.5***.7 IR -.37*** ***.5 dj_r Recapializaion Equally Weighed alue Weighed Equally Weighed alue Weighed Equally Weighed alue Weighed Equally Weighed alue Weighed lpha -.87** ** * ** * * **.33 MKT.44***..37***.9.67***.9.3***.7.65***..5***. SMB.87***..8***..8***..77***.9.9***.7.83***.8 HML -.56*** *** ***. -.55***. -.35*** ***.6 MOM -.35*** ***.5 IR -.45***. -.53***. dj_r

34 Table 7 oninued Geneal opoae pupose Equally Weighed alue Weighed Equally Weighed alue Weighed Equally Weighed alue Weighed Equally Weighed alue Weighed lpha MKT.3***.9.8***..47***..3***.9.4***..3***. SMB.9***.8.89***.7.4***.7.9***.6.87***.5.83***.5 HML -.58***. -.5***. -.68***. -.6*** ***. -.7***. MOM -.47*** ***.6 IR -.9*. -.7**. dj_r

35 Table 8 veage monhly abnomal equal-weighed pofolio eun fo hee-o-five yea holding peiods following secuiies offeings by U.S. fims. The able epos he ime-seies esimae of he consan em α by egessing he excess eun on a pofolio of issuing fims on a se of picing facos in an empiical asse picing model. The issue pofolio is fomed using equal-weighs. The issue s soc ypically enes he pofolio in he monh following he issue monh, and is held fom hee o five yeas o being delised fom he daa se. Supescip * indicaes ha α is saisically significanly diffeen fom zeo a he % level. Sudy Issue Sample Sample Holding α Type Size Peiod Peiod Jagadeesh ll ys -.3* Bav, Geczy, and Gompes ll ys -.9 Ecbo, Masulis, and Noli Ind ys -.5¹ Ecbo, Masulis, and Noli Ind ys -.4² Ecbo, Masulis, and Noli Ul ys -.3¹ Bayless and Jay 3 Ind ys -.54 Kishnamuhy,Spind,Subamaniam,Woide 5 ll ys -.36* Ecbo and Noli 5 Ind ys -.3⁴ Lyandes, Sun, and Zhang 5 ll ys.³ D Mello, Schlingemann, and Subamaniam ll ys -.3* ¹Picing model wih macoeconomic is facos. ²Picing model wih ama-ench faco. ³Picing model wih ama-ench, momenum, liquidiy facos. ⁴ Picing model wih ama-ench, momenum, and invesmen faco.

36 igue equency Disibuion of SEO ims acoss Size and Boo-o-Mae Quiniles This fis figue plos he numbe of SEO fims in each of he 5 size and boo-o-mae pofolios. The second figue plos he fequency of equiy issues in each decile. Issue ae equals he aveage of numbe of issues each yea ove oal numbe of fims in each pofolio. The size and boo-o-mae quinile beapoins ae fom Kenneh ench's websie.

37 igue oninued

38 igue The equency Disibuion of SEOs acoss Invesmen-o-sse Deciles This figue plos he numbe of SEO fims in each of he invesmen-o-asse deciles. Boo asses is measued as ompusa annual iem 6, and capial invesmen is measued as he change in iem 7 goss popey, plan, and equipmen. ollow Zhang 5, he invesmen o asses deciles beapoins ae fom soed non-issuing fims by hei invesmen-o-asse aios.

39 igue 3 Equiy Issues' and Maching Nonissues' Invesmen-o-sse 6 Monhs afe Equiy Issuance, 98 o 3 This figue plos SEO fims' and maching nonissues' median invesmen-o-asse duing 6 monhs afe equiy issuance in Panels, as well as hei coesponding Z-saisics fom he Wilcoxon es fo esing disibuional diffeences in Panels B. Z saisics beween - and indicae failue o ejec he null hypohesis of equal disibuion of chaaceisics beween SEOs and hei maching _ms. Monh is he monh of equiy issuance. Panel : Invesmen o asses in issues and non-issues Panel B: Z, Invesmen o sse