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Corporate Investment and Asset Price Dynamics: Implications for SEO Event Studies and Long‐Run Performance

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  • MURRAY CARLSON
  • ADLAI FISHER
  • RON GIAMMARINO

Abstract

We present a rational theory of SEOs that explains a pre‐issuance price run‐up, a negative announcement effect, and long‐run post‐issuance underperformance. When SEOs finance investment in a real options framework, expected returns decrease endogenously because growth options are converted into assets in place. Regardless of their risk, the new assets are less risky than the options they replace. Although both size and book‐to‐market effects are present, standard matching procedures fail to fully capture the dynamics of risk and expected return. We calibrate the model and show that it closely matches the primary features of SEO return dynamics.

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  • Murray Carlson & Adlai Fisher & Ron Giammarino, 2006. "Corporate Investment and Asset Price Dynamics: Implications for SEO Event Studies and Long‐Run Performance," Journal of Finance, American Finance Association, vol. 61(3), pages 1009-1034, June.
    • Handle: RePEc:bla:jfinan:v:61:y:2006:i:3:p:1009-1034
    DOI: 10.1111/j.1540-6261.2006.00865.x
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