Liquidity Management Around Seasoned Equity Offerings

This paper studies how firms manage liquidity around seasoned equity offerings and the impact of such behaviour on long run performance. We identify a pre-issue ‘debt trap' scenario where issuers raise equity to escape from the debt trap problem. We find some evidence that issuers with a debt supply problem manipulate their cash flow statement before the offerings and later stockpile cash to offset any costs resulting from manipulation. This pair of scenarios represents unique firm characteristics and liquidity resource allocation that can lead to different long run performance. We argue that any attempt to measure abnormal performance is misleading without properly distinguishing the two scenarios. We show that matching sample firms to control firms on pre-issue industry, performance and net debt ratio produces the most well-specified test statistics with most similar operating performance over the entire pre-event period. We find a transitory improvement in operating performance post-issue and find no underperformance in the long run. Finally, we link market with operating performance using the same liquidity matched control sample as they both track liquidity-related risks through factors of production. We suggest that investors expect transitory profits by projecting future cash flow of an investment project without replacement, and market underperformance occurs as remaining future project cash flows are re-estimated over time