IPOs and SEOs, real investments, and market timing: Emerging market evidence

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Wadhwa, Kavita
Nagi Reddy, V.
Goyal, Abhinav
Mohamed, Abdulkadir
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This study uses market-to-book ratio decomposition to examine whether firms that issue equity through initial public offerings or seasoned equity offerings exploit mispricing because of investor enthusiasm or to finance growth opportunities. We find strong evidence that, on average, firms do not issue mispriced stocks to exploit investors but, rather, to finance their investment opportunities in the form of real assets, inventory, and capital expenses. Firms that issue overvalued stocks with the view to increase their cash holdings experience poor long-run performance. Overall, our results show that stock mispricing drives equity offerings through IPOs and SEOs. Nonetheless, high transparency and balanced regulation in the marketplace deter issuing firms from investing their proceeds in non-value-creating activities. This evidence is robust to alternative measures of valuation and long-run performance.
Investment funding , IPOs , Long-run performance , Market-timing , Market-to-book ratio , Residual income model , SEOs
Wadhwa, K., Nagi Reddy, V., Goyal, A. and Mohamed, A. (2016) 'IPOs and SEOs, real investments, and market timing: Emerging market evidence', Journal of International Financial Markets, Institutions and Money, 45, pp. 21-41. doi: 10.1016/j.intfin.2016.05.007