IPOs and SEOs, Real Investments, and Market Timing : Emerging Market Evidence

This paper uses market-to-book ratio decomposition to examine whether firms that issue equity through initial public offerings or seasoned equity offerings exploit mispricing because of investor enthusiasm or to finance growth opportunities. We find strong evidence that, on average, firms do not issue mispriced stocks to exploit investors but, rather, to finance their investment opportunities in the form of real assets, inventory, and capital expenses. Firms that issue overvalued stocks with the view to increase their cash holdings experience poor long-run performance. Overall, our results show that stock mispricing drives equity offerings through IPOs and SEOs. Nonetheless, high transparency and balanced regulation in the marketplace deter issuing firms from investing their proceeds in non–value-creating activities. This evidence is robust to alternative measures of valuation and long-run performance