“SEO Risk Dynamics” by Ronald Giammarino
We theoretically and empirically investigate firm-level risk dynamics around seasoned equity offerings. Empirically, beta increases before SEOs and decreases gradually thereafter. Using real-options theory, commitment-to-invest generates a gradual post-issuance beta decline whereas instantaneous investment and time-to build do not. In a behavioral theory, systematic mispricing can cause increasing pre-issuance and decreasing post-issuance risk but idiosyncratic mispricing cannot. In the empirical cross-section, investment, own-firm runup, SEO proceeds, and primary issuance- associated with the real options theory- predict beta declines. Sentiment proxies have weaker effects in the full sample, but are significant in a post-1996 subsample. SEOs coincide with low firm- and market-volatility, suggesting volatility-timing in corporate decisions.