Review of Quantitative Finance and Accounting, 17: 63–79, 2001
2001 Kluwer Academic Publishers. Manufactured in The Netherlands.
An Empirical Examination of the Pricing of Seasoned
Equity Offerings: A Test of the Signaling Hypothesis
KHONDKAR E. KARIM
Associate Professor, Department of Finance, Accounting, and MIS, College of Business, Rochester Institute of
Technology, Rochester, NY 14623-5608, Fax: (716) 475-6920
ROBERT W. RUTLEDGE
Associate Professor, Department of Accounting, College of Business Administration, Southwest Texas State Uni-
versity, San Marcos, TX 78666-4616
STEPHEN C. GARA
Assistant Professor, School of Professional Accountancy, Long Island University - C.W. Post, Brookville, NY 11548
MOJIB U. AHMED
Associate Professor, Department of Accounting, University of Dhaka, Dhaka, Bangladesh
Abstract. This paper tests the predictions made by Signaling Theory against the competing Price–Irrelevance
Hypothesis (Eckbo and Masulis, 1992). Signaling Theory suggests that the issue price of a security provides a
signal of quality of the issuing ﬁrm. In contrast, the Price–Irrelevance Hypothesis suggests that equity pricing does
not possess information content. This paper investigates the pricing of seasoned equity offerings by examining the
role of ﬁrm quality and relative ﬁrm valuation on issue price discounts. Additionally, this paper investigates the
relationship between the issue price discount and the market reaction at the issuance of seasoned equity offerings.
The results indicate that ﬁrm quality does not have a signiﬁcant impact on the degree of price discounting by the
issuing ﬁrm. Relative ﬁrm market valuation does appear to be a determinant of the magnitude of discounting in
setting the issue price. This paper also provides evidence that seasoned equity offering ﬁrms that provide a lower
issue-price discount experience a lower stock-price decline following the issuance as compared to ﬁrms offering
a higher price discount.
Key words: seasoned equity offerings, ﬁrm valuation and quality, issue–price discount, Tobin’s Q, corporate
JEL Classiﬁcation: G12, G14, G32
This paper investigates the pricing of seasoned equity offerings by examining the role
of ﬁrm quality and relative ﬁrm valuation on issue price discounts.
paper investigates the relationship between the issue price discount and market returns
Address correspondence to: Khondkar E. Karim.