Firm liquidity around seasoned equity offerings and precautionary motives: UK and Nordic evidence

Abstract

A seasoned equity offering (SEO) offers a substantial liquidity injection to an issuer, but debate is still ongoing regarding the near-term need for proceeds versus market timing motivated issuance. The precautionary motive could offer an alternative explanation for post-SEO cash stockpiling that could also be a sign of market timing motivated issuance. The purpose of this thesis is to assesses whether precautionary motives is a determinant of SEO size in the Nordic countries and the UK. The thesis also analyses whether high precautionary motives firms issue more capital than needed for near-term use. Precautionary motive to hold cash relates to the unexpected future needs for liquidity especially during adverse market conditions and could be used as an alternative motivation for post-SEO cash stockpiling. High precautionary motives firms are defined as firms operating in the industries with above zero R&D expenses and top tertile long-term industry cash flow volatility as used by McLean and Zhao in prior studies.

The data comprises 2,696 SEO firm-year observations of public listed firms domiciled in the Nordic countries and the UK in 1990-2010 and the peer group data comprises 32,308 firm-year observations, not limited to issuers. The SEO data originates from the SDC Platinum New Issues database and all financial information is sourced from the Thomson ONE Banker database. The assessment of near-term need for SEO proceeds utilises a pro forma cash ratio that excludes SEO proceeds from the ex-post perspective. The thesis introduces pre-SEO excess cash to total assets as an added control variable to the model assessing precautionary motives as a determinant of SEO size. The dependent variable for SEO size is SEO proceeds during a firm-year scaled by the pre-SEO fiscal year-end total assets.

The data indicates that a positive relation between high precautionary motives status of a firm and SEO size does not exist, contrary to expectations. The findings are, however, sensitive to methods used. High precautionary motives status is related to a 9.6 percentage points fall in SEO size from a starting point of 36.4%. Above industry normal level pre-SEO cash ratio has a positive linkage to SEO size; a shift from median to 75th percentile pre-SEO excess cash relates to an 8.6 percentage points rise in SEO size, up from a starting level of 36.4%. The results suggest that factors other than high precautionary motives are determinants of a larger SEO size among the sample firms.

According to the data related to post-SEO liquidity, the pro forma cash ratio of high precautionary motives firms remains positive at 7.3% even without the SEO proceeds, at the aggregate level, from the ex post perspective, albeit statistically not significantly different from zero. Together these findings suggest that some precautionary or excess cash exists among high precautionary motives firms. However, there does not seem to be any indication of substantial post-SEO cash stockpiling either, at the aggregate level among the firms studied.