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Overinvestment And The Operating Performance Of Seo Firms, Fangjian Fu
Overinvestment And The Operating Performance Of Seo Firms, Fangjian Fu
Research Collection Lee Kong Chian School Of Business
Prior studies have documented that firms' operating performance deteriorates following seasoned equity offerings (SEOs). This paper proposes and empirically tests the hypothesis that the poor performance is caused by managers' overinvestment. I show that, subsequent to the offering, SEO firms tend to invest more heavily than non-issuing control firms that are in the same industry and have enough financial slack and similar amounts of investment opportunities. More importantly, I find a negative relation between post-issue investment and operating performance, controlling for investment opportunities and pre-issue performance. The evidence supports an overinvestment interpretation as it stands in contrast to the prediction …
Strategic Financial Management: Evidence From Seasoned Equity Offerings, Michael Barclay, Fangjian Fu, Clifford Smith
Strategic Financial Management: Evidence From Seasoned Equity Offerings, Michael Barclay, Fangjian Fu, Clifford Smith
Research Collection Lee Kong Chian School Of Business
Extant theories of capital structure assume myopic financial managers. So they have hard time to explain the financing behavior of seasoned equity offering (SEO) firms. In contrast with the pecking order theory, SEO firms typically are financially healthy companies with significant cash balances, low leverage, and unused debt capacity. At odds with the tradeoff theory, SEOs often move firms away from, rather than closer to, their target leverage ratios. SEOs appear to be driven by capital needs associated with large investment projects rather than by market timing considerations. Firms issue debt following the SEO to finance investment further and to …