Windows of opportunity and seasoned equity offerings: An empirical study

Abstract

Taking a sample of seasoned equity offerings (SEOs) by firms listed on Bombay Stock Exchange (BSE) from the year 1992 to 2012, we examine two of the key issues concerning SEOs. First, whether SEOs are underpriced, issued at a price lower than the prevailing market price; and second, whether companies time their issues. Study of 162 SEOs exhibits significant underpricing at 1% significance level leading us to conclude that SEOs in India are significantly underpriced. Analysis of abnormal returns for 114 SEOs taking different event windows surrounding issue opening dates reveals that, except for the −1 to + 1 event window, CAAR for all other event windows are significantly negative. This leads us to conclude that investors in India experience significantly negative abnormal returns surrounding SEO issue opening. Overall, findings of the study reveal that SEOs in India are underpriced and that there exist windows of opportunity for SEOs in India.

Keywords:

• seasoned equity offerings
• underpricing
• windows of opportunity
• abnormal returns

JEL classification:

• G12

PUBLIC INTEREST STATEMENT

Seasoned equity offering (SEO) is a method of raising equity capital by issuing shares to the public, usually at a price below the prevailing market price, by firms already listed on the stock exchanges. In India, it is called Follow-on Public Offerings (FPOs). It is common that when companies go public through initial public offerings (IPOs), shares issued through these IPOs generally experience two kinds of anomalies—underpricing and long-run underperformance. If the price quoted on the listing day, especially the closing price, is significantly higher than the issue price, it is called underpricing. Similarly, if the long-run return with listing day closing price as the base is negative, it is called underperformance. In this study, we examine the presence of windows of opportunity for SEOs taking a sample of 162 SEOs announced by firms listed on Bombay Stock Exchange (BSE), India, during the years 1992 to 2012. We also examine whether there have been abnormal returns surrounding the SEOs.

Acknowledgements

The authors thank Dr Numan ÜLKÜ, Senior Lecturer of Finance, University of South Australia and the reviewers for their comments on the earlier versions of this paper. The authors have greatly been benefited from these comments and the quality of the paper has certainly improved by incorporating their suggestions.

Additional information

Funding

The authors received no direct funding for this research.

Notes on contributors

K.R. Naveen Kumar

Dr K.R. Naveen Kumar, He has 19 years of teaching experience at the under-graduate and post-graduate levels. He has been awarded with PhD for the thesis titled “A Study of Pricing and Performance of Public Issues in Indian Capital Market” by Mangalore University. He has done his research in capital market in India.

Iqbal Thonse Hawaldar

Professor Iqbal Thonse Hawaldar, Having obtained his PhD for the thesis titled “Efficiency of the Indian Stock Market” from Mangalore University, India, he continues to commit himself to teaching and research. He has published a book titled “Efficiency of Stock Market”, which continues to be a significant resource in its domain.

T. Mallikarjunappa

Professor T. Mallikarjunappa, He has 36 years of postgraduate teaching and research experience and published 125 research papers and presented 350 papers in the international and national conferences and seminars. He got Outstanding Management Teacher and Researcher Award, Outstanding Management Research Guide award, Best Teacher in Financial Management, and Best Teacher award. He has successfully supervised 15 students leading to the award of PhD in management.