Investigations into the underpricing of seasoned equity offerings and the cost of equity

Anh Duc Ngo, University of Texas at El Paso


This dissertation consists of three separate but related essays investigating new determinants of the underpricing of seasoned equity offering (SEOs). It also examines new mechanisms and channels that affect the pricing of SEOs. The first essay examines the impacts of earnings smoothing on SEO underpricing. It aims to investigate whether earnings smoothing can add value to firms by reducing the degree of SEO underpricing. The findings show that smoothing earnings performance resulting from discretionary accruals is negatively related to SEO underpricing and improve earnings informativeness. This essay contributes specifically to the current literature on earnings smoothing by demonstrating that high quality firms that expect larger quantity of cash flow in the near future are more likely to actively smooth earnings via discretionary accruals before SEOs to reduce underpricing. The second essay explores the role of lines of credit in pricing seasoned equity offerings via market timing activities. This essay provides evidence that lines of credit, while not perfect substitutes for cash holdings, give firms the option to delay equity offerings until market conditions become more favorable, thereby creating value for current shareholders. Interestingly, these effects are not observed when firms are financially constrained. The third essay investigates the impact of covenant violations on SEO underpricing. It also directly quantifies the changes in implied cost of equity surrounding covenant violations. The results show that seasoned equity offerings are more underpriced after covenant violations. The findings show that firms that violate a covenant, on average, experience an 8.4% increase in the implied cost of equity. This suggests that creditors may force violating firms to issue equity to lower leverage, thereby resulting in a higher degree of SEO underpricing through the SEO episodes.

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Recommended Citation

Ngo, Anh Duc, "Investigations into the underpricing of seasoned equity offerings and the cost of equity" (2013). ETD Collection for University of Texas, El Paso. AAI3594354.