Working Paper: NBER ID: w11797
Authors: Woojin Kim; Michael S. Weisbach
Abstract: This paper examines the extent to which investment financing and market-timing explanations motivate public equity offers. We consider a sample of 16,958 initial public offerings and 12,373 seasoned equity offerings from 38 countries between 1990 and 2003. We provide estimates of the change in each accounting variable for each dollar raised in an equity offer, and for each dollar of internally generated cash. Our estimates imply that firms invest 18.8 cents in R&D and 7.3 cents in capital expenditures for an incremental dollar raised in an equity offer during the year following the offer, rising to 84.8 cents and 14.3 cents when the change is measured over a four-year period. These findings are consistent with one motive for the equity offer being to raise capital for investment. However, firms also hold onto much of the cash they raised, and this fraction is higher when the firm has a high q. In addition, firms are more likely to issue secondary shares, which are usually sold by insiders, when q is high, enabling insiders to benefit personally from potential overvaluation. These results suggest that market timing as well as investment financing is a motivation for equity offers.
Keywords: Public Equity Offers; Investment Financing; Market Timing; Tobin's q
JEL Codes: F3; G3
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Raising equity capital (G24) | Increased investment in R&D (O39) |
| Raising equity capital (G24) | Increased capital expenditures (G31) |
| Raising equity capital (G24) | Increased investment in R&D (over four years) (O32) |
| Raising equity capital (G24) | Increased capital expenditures (over four years) (G31) |
| High Tobin's q (G19) | Likelihood of issuing secondary shares (G24) |
| High Tobin's q (G19) | Cash retention from raised capital (G32) |
| Low Tobin's q (G19) | Increased sensitivity of investment to capital raised (G31) |
| High Tobin's q (G19) | Decreased sensitivity of investment to capital raised (G31) |