An empirical examination of the pricing of seasoned equity offerings: a test of the signalling hypothesis
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Date
2000-06Author
Karim, Khondkar
Gara, Stepgen
Rutledge, Robert
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This paper tests the predictions of Signaling Theory against the competing Price Irrelevance Hypothesis (Eckbo and Masulis 1992). Signaling Theory suggests that a security offer's issue price provides a signal of the quality of the issuing firm. In contrast, the Price Irrelevance Hypothesis suggests that equity pricing does not possess information content. This paper investigates the pricing of seasoned equity offerings by examining the role of firm quality and relative firm valuation on offering price discounts. Additionally, the impact of the price discount on firm stock price is investigated. The results indicate that the issue price conveys relevant information to the market about the value of the issuing firm. Undervalued firms are found to possess a relatively lower price discount that overvalues firms.
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