Seasoned equity issuers' r&d investments: Signaling or overoptimism

Hong Qian, Ke Zhong, Zhaodong Ken Zhong

Research output: Contribution to journalArticlepeer-review

9 Scopus citations

Abstract

It is well known that investors often react negatively to the announcements of seasoned equity offerings (SEOs). We posit that issuers can use positive discretionary (higher than expected) R&D investments before the SEO to signal their investment prospects to mitigate the negative announcement effect. Alternatively, positive discretionary R&D may be attributed to managerial overoptimism about future returns of R&D investments. We find strong support for the signaling hypothesis among high-tech issuers: investors respond more favorably to the SEO announcements of high-tech issuers with positive discretionary R&D; these issuers are more likely to use new capital in future R&D and they produce better post-SEO operating performance. In contrast, we find some evidence of managerial overoptimism among low-tech issuers: investors tend to penalize low-tech firms with positive discretionary R&D at SEO announcements; they are more likely to hold new capital as cash and they fail to produce better post-SEO operating performance.

Original languageEnglish (US)
Pages (from-to)553-580
Number of pages28
JournalJournal of Financial Research
Volume35
Issue number4
DOIs
StatePublished - Dec 2012

All Science Journal Classification (ASJC) codes

  • Accounting
  • Finance

Fingerprint

Dive into the research topics of 'Seasoned equity issuers' r&d investments: Signaling or overoptimism'. Together they form a unique fingerprint.

Cite this