Corporate governance and investor reactions to seasoned equity offerings

Abstract

Purpose The purpose of this paper is to study the role of corporate governance in abnormal returns around announcements of seasoned equity offerings (SEOs) by publicly traded US firms from 2001 to 2004. Design/methodology/approach Cross‐sectional regression analysis was used to determine which variables are important to the market's reaction to the SEO, with a particular focus on corporate governance variables. Findings It was found that investors react more positively for firms in which different people hold the CEO and board chairman positions. Limited evidence was found that investor reaction is more positive when the board has a greater representation of outside directors, the CEO has less ownership, and the board is not too large. These findings suggest that investors react more favorably to SEOs by firms with stronger corporate governance mechanisms that reduce adverse selection or agency problems. Practical implications This paper's findings are evidence that stronger boards can reduce a firm's cost of raising additional equity capital. Originality/value – There is not believed to be any other published paper that examines the impact of corporate governance mechanisms on the reaction to SEOs with such a comprehensive sample or in post‐Enron periods.