Abstracts Economics

Seasoned equity offerings and market volatility

by Chanyoung Eom

New equity shares are sold for raising capital via a primary seasoned equity offering (SEO). In their 2010 article, Murray Carlson, Adlai Fisher, and Ron Giammarino discovered an intriguing relationship between market volatility and primary SEOs, namely that the volatility decreases before a primary SEO and increases thereafter. This pattern contradicts the real options theory of equity issuance for investment. In this study, I examine in greater detail whether the pre- and post-issue volatility dynamics are related to the probability of issuing new equity. I find little evidence that the decision to conduct a primary SEO depends on changes in market volatility after controlling for previously recognized determinants of SEOs. This reconciles the volatility finding of Carlson et al. with the real options theory of equity issuance for investment. I also examine secondary SEOs, in which only existing equity shares are sold and therefore no capital is raised by the firm. For secondary SEOs, real options theory makes no predictions about risk changes around the events. I find that market volatility tends to decline before a secondary SEO, a finding which warrants further attention.