Motivations for public equity offers: An international perspective

This paper examines the extent to which investment financing and market-timing explanations motivate public equity offers, using a sample of 17,226 initial public offerings and 13,142 seasoned equity offerings from 38 countries between 1990 and 2003. We provide estimates of the changes in a number of accounting variables for each dollar raised in an equity offer, and for each dollar of internally generated cash. Our estimates imply that firms invest 18.5 cents in R&D and 9.9 cents in capital expenditures for an incremental dollar raised in an IPO during the year following the offer, rising to 78.0 cents and 19.9 cents when the change is measured over a four-year period. These findings are consistent with one motive for the equity offer being to raise capital for investment. However, firms also hold on to much of the cash they raised in both IPOs and SEOs. For our sample of SEOs, high market to book firms tend to save a particularly high fraction of the cash they raise, while low market to book firms tend to invest the cash they raise. In addition, firms are more likely to issue secondary shares in SEOs, which are usually sold by insiders, when the market to book ratio is high, enabling insiders to benefit personally from potential overvaluation. These results suggest that market timing as well as investment financing is a motivation for equity offers. JEL classification: G31; G32