The Impacts of Overinvestment and Financial Constraints on Seasoned Equity Offering Long-Run Performance

Authors

  • Pei-shan Lu
  • Weiju Young Chaoyang University of Technology Department of Accounting
  • Meng Sung Hsieh

Abstract

This study considers overinvestment and financial constraints as factors that associate with managerial incentives of firms conducting seasoned equity offerings (SEOs). The results show that pre-issue overinvestment and financial slack are negatively related to the long-run performance of SEO firms. It implies that SEOs of firms with these two characteristics are driven by managerial incentive misalignment, resulting in their lackluster long-run performance after SEOs. In other words, overinvesting and financially unconstrained firms may conduct SEOs due to managers' empire-building desires. These results should remind the board of directors to prevent managers' equity financing from serious overinvestment and that long-run investors should avoid buying new-issue shares of firms with overinvestment and financial slack.

Keywords:   Seasoned Equity Offerings (SEOs); Overinvestment; Financial Constraints; Managerial Incentives

JEL Classifications: G30, G32

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Published

2017-10-31

How to Cite

Lu, P.- shan, Young, W., & Hsieh, M. S. (2017). The Impacts of Overinvestment and Financial Constraints on Seasoned Equity Offering Long-Run Performance. International Journal of Economics and Financial Issues, 7(5), 216–224. Retrieved from https://www.econjournals.com/index.php/ijefi/article/view/5241

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