The Impact of Cost of Equity on Seasoned Equity Offerings

Abstract

This paper studies the impact of forward-looking cost of equity on firms¿ Seasoned Equity Offerings. The market wide SEO issuances, firm level SEO likelihood and the amount of proceeds from SEO are greater when the forward-looking cost of equity is low. Small firms¿ issuance decisions are particularly sensitive to the fluctuation of forward-looking cost of equity, suggesting the impact from cost of equity is greater for firms with more financial constraints. Moreover, firms issuing SEOs at high forward-looking cost of equity are having more negative announcement returns and followed by lower long run post-SEO returns. A distress based explanation is consistent with the empirical observations.