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Equity Offerings & Tail Risk

It’s logical to believe that corporate managers have a preference for issuing equity at times they perceive their firm’s stock price is overvalued or high relative to some benchmark (such as price-to-earnings ratio or book-to-market ratio). The academic research on the subject supports this hypothesis—seasoned equity offerings (SEOs) do tend to be preceded by unusually high stock returns.

The academic research also shows there are incentives that can lead corporate managers to have a tendency to hoard bad news (for example, concerns about current-period performance-based compensation, prospects for promotion, future employment, post-retirement benefits such as directorships, the potential for termination, and the hope that subsequent positive events will allow them to “bury” the negative news).

Read the rest of the article on ETF.com.

 

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