Firm age, idiosyncratic risk, and long-run SEO underperformance

Chia Wei Huang*, Po Hsin Ho, Chih-Yung Lin, Ju Fang Yen

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

4 Scopus citations

Abstract

Post-issue stock underperformance is driven, at least in part, by young issuers with contemporary decline in idiosyncratic risk (proxied by expected idiosyncratic volatility) exposure. We show that the SEO long-run underperformance primarily occurs in young issuers. The intuition is that young firms generally have greater uncertainty about their future profitability due to greater intangible growth options. Therefore, when young firms finance investment from SEO proceeds, this uncertainty could be resolved because growth options are converted into assets in place, leading to a larger reduction in idiosyncratic risk than their matched non-issuers suggest. Furthermore, there is no evidence of post-issue stock underperformance and abnormal decline in idiosyncratic risk for mature issuers, supporting the growth option perspectives.

Original languageEnglish
Pages (from-to)246-266
Number of pages21
JournalInternational Review of Economics and Finance
Volume34
DOIs
StatePublished - 1 Nov 2014

Keywords

  • Firm age
  • Growth option
  • Idiosyncratic risk
  • Long-run performance
  • Seasoned equity offerings

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