Exercising growth options through seasoned equity offerings : comparative impact on the stock returns of Nordic issuers

Abstract

The apparent long-run abnormal underperformance of equity issuers has stirred great interest in finance until real (growth) options explanations have been successfully developed and tested on American SEO data in recent years. Drawing on the existing literature and on a sample of Norwegian, Swedish and Danish seasoned equity offerings from 1997 to 2009 our paper highlights a risk pattern for the issuers around the SEO date consistent with the predictions of the real options theories, namely a risk run-up prior to issuance followed by a decrease in beta after issuance. We also find significant evidence of long-run abnormal performance for equally weighted SEO portfolios in factor regressions. The magnitude and the significance of the intercepts are reduced or eliminated if the SEO portfolios returns are value-weighted instead of equally weighted. An investment factor long in low investment stocks and short in high investment stocks used to augment CAPM and Fama French regressions does not clear the underperformance but does contribute to a small reduction in the magnitude and significance of the intercepts in factor regressions. We believe that our mixed evidence generally speaks in favour of the growth options theories and calls for further research in this area.