Does liquidity risk explain low firm performance following seasoned equity offerings?

► We examine whether liquidity risk explains low firm performance following SEOs. ► SEO firms experience significant improvements/reductions in liquidity/liquidity risk. ► Size and book-to-market matching fails to control for these liquidity effects. ► After adjusting for liquidity risk, SEO firms s...

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Bibliographic Details
Published in:Journal of banking & finance 2012-10, Vol.36 (10), p.2770-2785
Main Authors: Bilinski, Pawel, Liu, Weimin, Strong, Norman
Format: Article
Language:English
Subjects:
Capital costs
Cost of capital
Economic performance
Equity
Event studies
Financial risks
Liquidity
Liquidity risk
Long-term analysis
Portfolio performance
Risk management
Seasoned equity offerings
Stock offerings
Studies
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Summary:► We examine whether liquidity risk explains low firm performance following SEOs. ► SEO firms experience significant improvements/reductions in liquidity/liquidity risk. ► Size and book-to-market matching fails to control for these liquidity effects. ► After adjusting for liquidity risk, SEO firms show normal long-term performance. A seasoned equity offering (SEO) can improve a firm’s stock liquidity and lower its cost of capital. This paper examines whether SEO firms achieve a liquidity gain and the sources of this gain. It explores the role of liquidity risk in explaining SEO long-run performance. The evidence shows that SEO firms experience significant post-issue improvements in liquidity and reductions in liquidity risk. Size and book-to-market matching fails to control for these liquidity effects, generating the low long-term post-SEO performance documented in the literature. After adjusting for liquidity risk, SEO firms show normal long-term performance.
ISSN:0378-4266
1872-6372
DOI:10.1016/j.jbankfin.2012.07.009