Evidence on the Tradeoff Between Risk and Return for Ipo and Seo Firms

50 Pages Posted: 6 Oct 2005

See all articles by Alon Brav

Alon Brav

Duke University - Fuqua School of Business; European Corporate Governance Institute (ECGI); National Bureau of Economic Research (NBER)

Roni Michaely

The University of Hong Kong; ECGI

Michael R. Roberts

The Wharton School - University of Pennsylvania; National Bureau of Economic Research (NBER)

Rebecca Zarutskie

Board of Governors of the Federal Reserve System

Date Written: March 26, 2007

Abstract

Do the low long-run average returns of equity issuers reflect Do the low long-run average returns of equity issuers reflect underperformance due to mispricing or the risk characteristics of the issuing firms? We shed new light on this question by examining how institutional lenders price loans of equity-issuing firms. We find that equity-issuing firms' expected debt return is equivalent to the expected debt return of non-issuing firms with similar characteristics, implying that institutional lenders perceive equity issuers to be as risky as similar non-issuing firms. We also find that institutional lenders perceive small and high book-to-market borrowers as systematically riskier than larger borrowers with low book-to-market ratios, consistent with the asset pricing approach in Fama and French (1993). Finally, we find that firms' expected debt returns decline after equity offerings, consistent with recent theoretical arguments suggesting that firm risk should decline following an equity offering if equity is issued to exercise a real option. Overall, our analysis provides novel evidence consistent with risk-based explanations for the observed equity returns following IPOs and SEOs.

Keywords: Equity Offering, Private Debt, Institutional Lenders

JEL Classification: G11, G12, G14, G2

Suggested Citation

Brav, Alon and Michaely, Roni and Roberts, Michael R. and Zarutskie, Rebecca, Evidence on the Tradeoff Between Risk and Return for Ipo and Seo Firms (March 26, 2007). Available at SSRN: https://ssrn.com/abstract=809864 or http://dx.doi.org/10.2139/ssrn.809864

Alon Brav

Duke University - Fuqua School of Business ( email )

100 Fuqua Drive
Durham, NC 27708-0120
United States
919-660-2908 (Phone)
919-684-2818 (Fax)

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Roni Michaely

The University of Hong Kong ( email )

Pokfulam Road
Hong Kong, Pokfulam HK
China

ECGI ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Michael R. Roberts

The Wharton School - University of Pennsylvania; National Bureau of Economic Research (NBER) ( email )

3620 Locust Walk, #2320
Philadelphia, PA 19104-6365
United States
(215) 573-9780 (Phone)

HOME PAGE: http://finance.wharton.upenn.edu/~mrrobert/

Rebecca Zarutskie (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and C Streets NW
Mailstop 155-B
Washington, DC 20551
United States
202-452-5292 (Phone)

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