Articlegreen2010

Overinvestment and the Operating Performance of SEO Firms

90 citations0/0 files storedFinancial Management

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Corporate Finance and Governance Financial Markets and Investment Strategies Financial Analysis and Corporate Governance

Abstract

Prior studies have documented that firms' operating performance deteriorates following seasoned equity offerings (SEOs). This paper proposes and empirically tests the hypothesis that this poor performance is the result of managers' overinvestment. I find that, subsequent to the offering, SEO firms tend to invest more heavily than nonissuing control firms that are in the same industry and have enough financial slack and similar investment opportunities. More importantly, I find a negative correlation between postissue investment and operating performance, controlling for investment opportunities and preissue performance. Overinvestment results in a reduction in asset productivity and is more severe for firms with relatively fewer investment opportunities.

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References

1986Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers 1973Risk, Return, and Equilibrium: Empirical Tests 1996Agency costs of free cash flow, corporate finance, and takeovers 1993The Modern Industrial Revolution, Exit, and the Failure of Internal Control Systems 1988Financing Constraints and Corporate Investment 1969A General Equilibrium Approach To Monetary Theory 1987Financing Constraints and Corporate Investment 1992The investment opportunity set and corporate financing, dividend, and compensation policies

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