Do Governments Time Their Stock Issues?

Abstract

Several signaling models predict that firms underprice their initial offerings of equity deeply so that they can subsequently issue seasoned equity at more favorable terms. We test the implications of those models. We find a positive relation between IPO underpricing and the possibility of and the size of subsequent seasoned equity offerings. We find that firms that experience relatively larger IPO-date returns are more likely to issue seasoned equity within three years of their IPOs and that their seasoned equity offerings tend to be larger. We also find that the market returns in the two 20 day periods immediately following the IPOs are insignificantly related to the probabilities of subsequent seasoned equity offerings and the sizes of these offerings. Curiously, firms that experience relatively high returns in these periods return to the market with a seasoned equity issue more slowly than firms with low aftermarket returns. Evidences also indicate that signaling model tends to hold, while market-feedback hypothesis does not. These results are in sharp contrast with the ones in Jegadeesh et al. (1993). Our results also indicate that the return on the date of the IPO “does” play a unique role in predicting future seasoned equity offerings. Those results suggest that in line with basic implications of the signaling hypothesis, issuers might have to rely on the costly underpricing mechanism to signal to the market information relevant for future equity issues. This is a separating equilibrium. Therefore, we find evidence consistent with the signaling hypothesis, when the evidence documented here is viewed in its entirety, the support for the signaling hypothesis as a major determinant of IPO underpricing is relatively strong. Moreover, we find that LogGDP, standing proxy for institutional features of the nation, and law-related dummy play crucial role in designing subsequent SEO decisions.