New Evidence on the Timing, Investment and Liquidity Motivations for Public Equity Offers

This study examines the motivations for seasoned equity offering and the decomposition strategy that breaks the book-to-market ratio into misvaluation and growth components. In logit-based tests, we find strong support for the misvaluation explanation, which predict that firms issue when equities are overvalued. However, the growth component runs counter to conventional wisdom as a proxy for investment opportunities and obscures a more complicated relationship between the accounting for operating and financing activities (leverage). Given a low book-to-value ratio, two groups of firms are both likely to conduct an SEO: one with low operating growth and positive leverage, whereas another group with high operating growth and negative leverage. Apart from market timing, the former is also motivated from a demand for liquidity whereas the latter is consistent with an investment-based explanation. Finally, we document evidence that issuers with low growth opportunities and/or high overvaluation are more likely to issue combined or pure secondary shares rather than primary shares.