The announcement impact of seasoned equity offerings on bondholder wealth

Abstract

Previous studies document a negative and significant return to equity on the announcement of a seasoned equity offering. However, the effects of such an announcement on the firms other securities has received little attention. Using a sample of seasoned equity offerings made between 1980 and 2000 we analyze the effects of an SEO on the firm’s bondholders. We find, on average, that bondholders enjoy a significantly positive return on the announcement of an SEO. This result is more pronounced for bonds with longer maturities and for bonds with lower bond ratings. We interpret these results as evidence in favor of the unanticipated leverage change hypothesis and the wealth transfer hypothesis. The results are inconsistent with the information-signaling hypothesis for SEOs. We also find strong evidence of a negative relationship between dollar losses to shareholders and dollar gains to bondholders. We interpret this as additional evidence that, at least in the case of SEOs, that the wealth transfer hypothesis best describes the data.