Is there Abnormal Return after Seasoned Equity Offerings?

Previous studies have documented that firms participating in Seasoned Equity Offerings (SEO) show substantial long-run stock underperformance. This finding poses one of the strongest challenges to the Efficient Market Hypothesis (EMH). However, other studies argue that these empirical studies are plagued by the inability of the matching techniques to properly control for all risk factors, and thus, the resulting evidence may not be reliable. We show that these arguments are valid because traditional matching methods are not able to balance ex ante variables well due to the “dimens ionality curse”. This study contributes to the literature by implementing the propensity score matching method, which reduces the matching problem from multiple dimensions to one dimension, and is thus able to match multiple firm characteristics simultaneously. We investigate various market and accounting variables and find that size, book-to-market ratios and past returns are the main factors affecting both firms’ SEO decision and their long-run stock performance. We estimate propensity scores conditional on these important factors, and apply this matching method to SEO data during the period from 1986 to 1998. We find that even under the equal-weighting and buy-and-hold method, the long-run abnormal returns after SEOs disappear.