Seasoned Equity Offerings and the Cost of Market Timing

A robust finding in the literature is that seasoned equity offerings (SEOs) are followed by negative long-run abnormal returns, which can be seen as evidence of market timing. In this paper I document the cost of market timing, based on the idea that investors view companies with the most negative abnormal returns in the year following a SEO, as most likely to have timed the issue. I find that these companies compensate investors by offering a larger discount in subsequent SEOs. I also show that issuers anticipate the higher underpricing and are more likely to switch to debt if the returns following a previous SEO were more negative. The effect of past market timing on underpricing is more pronounced if the CEO does not change in between issues. I also find that investors show a greater aversion to losses, in line with the predictions of prospect theory. I find no evidence that underpricing is related to the returns following an IPO, suggesting that investors view IPOs as being less indicative of the market timing motives of follow-on equity issuers.