The purpose of this paper is to discover how firms use issue proceeds from seasoned equity offerings (SEOs).
Utilizing a large sample of industrial corporations, the authors perform a series of regressions in which the dependent variable is one of six use categories and the independent variables are issue proceeds, other sources, and control variables. The impact of macroeconomic conditions on the use of issue proceeds is explicitly considered and the primary use is found to be investment in R&D.
Some evidence is found that issue proceeds are funnelled into cash, capital expenditures, and acquisitions but these do not seem to be the primary use. While the results suggest a motive for issue that does not rely on behavioural theories, they also suggest that investment theories must reconcile the weak post‐issue performance of SEO firms with the fact that, in general, R&D investment is associated with positive abnormal returns and operating performance. To that end the evidence is consistent with equity issues being made in reaction to exogenous reductions in required returns and during periods when growth opportunities are more plentiful.
This is the first paper to explicitly consider the role of macroeconomic conditions in the use of proceeds from seasoned equity issues and to document that the primary use is investment in R&D. The results will help scholars better understand the motivation for SEOs and assist in evaluating explanations of the poor performance of issuers. The results also provide practitioners with valuable benchmarks of the use of issue proceeds, which they can use to evaluate equity as a source of external funding for their company.
