Abnormal investment, changes in institutional ownership, and SEO long-run performance

Abstract

Purpose

The purpose of this paper is to investigate that how firms’ pre-issue investment levels and changes in institutional ownership (IO) affect their long-run performance after seasoned equity offerings (SEOs).

Design/methodology/approach

The authors use Richardson’s (2006) method to measure firms’ pre-issue investment levels and then divide the SEO firms into the under-, normal-, and overinvesting groups. The study examines the relation between the pre-issue abnormal investment and long-run post-issue performance. In addition, the authors examine whether changes in IO around SEOs affects SEO firms’ performance.

Findings

The authors find a quadratic relation between the pre-issue abnormal investment and the long-run post-issue performance. In other words, the underinvesting and overinvesting groups tend to underperform. The authors also find that changes in IO around SEOs positively associate with firms’ long-run performance.

Research limitations/implications

The authors ascribe the underperformance of underinvesting firms to the deficiency of good growth opportunities; for overinvesting firms, the authors link to the misalignment problem of managerial incentive (i.e. empire building).

Originality/value

The results suggest that long-run investors should be cautious of buying new-issue shares of underinvesting and overinvesting firms, especially those with insignificant increases in IO.

Citation

Young, W. and Wu, C.-C. (2017), "Abnormal investment, changes in institutional ownership, and SEO long-run performance", Managerial Finance, Vol. 43 No. 8, pp. 842-864. https://doi.org/10.1108/MF-08-2016-0243