@article{673ec922078a4efe8ed29bb9bdfab044,
title = "Behavioral and rational explanations of stock price performance around SEOs: Evidence from a decomposition of market-to-book ratios",
abstract = "We examine the extent to which investment opportunities and/or mispricing motivate equity issuance and contribute to post-issue stock underperformance. We decompose market-to-book ratios into misvaluation and growth option components and find that issuing firms are both overvalued and have greater growth opportunities relative to nonissuers. Firms with greater growth opportunities invest more in capital expenditures and research and development (R&D) after issuance but do not experience lower post-issue stock returns. In contrast, issuing firms with greater mispricing tend to decrease long-term debt and/or increase cash holdings and do earn lower returns. Our findings are consistent with behavioral explanations for post-issue stock price underperformance.",
author = "Michael Hertzel and Zhi Li",
note = "Funding Information: ∗Hertzel, michael.hertzel@asu.edu, Carey School of Business, Arizona State University, PO Box 873906, Tempe, AZ 85287; Li, zli1@tulane.edu, Freeman School of Business, Tulane University, 7 McAlister Dr., New Orleans, LA 70118. We thank Murray Carlson, Jeffrey Coles, Werner DeBondt, Erik Devos (FMA discussant), Stephan Dieckmann, Mark Huson, Michael Lemmon, Evgeny Lyandres, Paul Malatesta (the editor), Spencer Martin, Wayne Mikkelson, Micah Officer, Mitchell Petersen, Jay Ritter (associate editor and referee), David Robinson (AFA discussant), Sunil Wahal, and seminar participants at Arizona State University, Claremont McKenna College, the DePaul University and Federal Reserve Bank of Chicago joint research seminar, Lancaster University, the University of Alberta, the University of Florida, the University of Oklahoma, the 2007 Financial Management Association meeting, and the 2008 American Finance Association meeting for helpful comments. We also thank Evgeny Lyandres for providing us with the investment factor. Hertzel gratefully acknowledges financial support from the Carey School of Business Dean{\textquoteright}s Council of 100.",
year = "2010",
month = aug,
doi = "10.1017/S002210901000030X",
language = "English (US)",
volume = "45",
pages = "935--958",
journal = "Journal of Financial and Quantitative Analysis",
issn = "0022-1090",
publisher = "Cambridge University Press",
number = "4",
}