3 Growth Options, Market Timing and Seasoned Equity Offerings in the Renewable Energy Industry
Seasoned equity offerings (SEOs) are typically accompanied by previous stock price run-ups, high share valuations and poor stock price performance following the offering (Ritter, 2003). These patterns are inconsistent with two key financial policies: the pecking-order theory (Myers and Majluf, 1984) and various tax and leverage cost trade-off models. According to the pecking-order theory, external equity financing ranks last among the financing choices when other forms are available. Stock price run-ups, however, indicate additional borrowing capacity and thus suggest additional debt rather than equity financing. Trade-off models similarly predict additional leverage (or increased dividends) to return to the firm’s target capital structure after the stock price run- up has tilted the balance towards equity (DeAngelo, DeAngelo, and Stulz, 2010). Given the failure of these theoretical models to explain issuing patterns, Loughran and Ritter (1995) suggest that managers, led by the presence of asymmetric information, time the market and sell equity when valuations are high, providing incumbent shareholders with an advantage at the expense of out- side investors. Many studies have documented market timing for both primary and follow-on equity offerings.26 Recent research by Howe and Zhang (2010) on SEO cycles over a 33-year period tests prominent drivers of SEO activity and finds support only for the market timing and capital demand hypotheses. While research has produced rich evidence of the very existence of market timing, its economic impact has received less attention. DeAngelo, DeAngelo, and Stulz (2010), in their study of 4,291 industrial SEOs in the U.S. (1973-2001), find...
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