"Institutional Shareholder Investment Horizons and Seasoned Equity Offerings"

Institutional Shareholder Investment Horizons and Seasoned Equity Offerings Abstract The investment horizons of a firm’s institutional shareholders are strongly related to the short-run and long-run stock price reaction for firms conducting seasoned equity offerings (SEOs). Firms with more short-term shareholders experience significantly worse abnormal returns at the announcement as well as over the next several years. This effect is strong for primary offerings (in which only firms receive proceeds) but is not present for secondary offerings (in which firms do not receive any proceeds). For firms that have conducted primary offerings, a shorter shareholder horizon can significantly predict worse post-issue operating performance and analysts fail to recognize this relation. Moreover, the negative relation between the issuing firm’s shareholder horizon and its stock market performance and operating performance can be mitigated by a better alignment of interests between managers and shareholders. The evidence is consistent with the agency argument that managers are more likely to misuse shareholder capital in firms with more short-term shareholders.