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.
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