Seasoned Equity Offerings: The Market Reaction to the Disclosure of Intended Use of Proceeds - Evidence from Sweden

Abstract: Using a hand-collected sample of 228 Seasoned Equity Offerings (SEOs) on the Swedish market between 2010 and 2019, we investigate the effect of the disclosure of intended use of proceeds on share price at announcement, distinguishing between firms raising money for investment purposes, refinancing purposes and general corporate purposes. Previous literature on the intended use of proceeds in SEOs finds that the market reacts less negatively to motives for investment in the disclosure. The same results were expected for firms in the Swedish market. We find that the market reacts more favorably to firms stating investment purposes as compared to refinancing purposes and general corporate purposes. Moreover, we aim to extend previous literature by investigating whether there are mechanisms that prevent all firms issuing seasoned equity from stating motives for investment. By running cross-sectional analyses we find that the market differentiates firms who state specific investment plans depending on the level of investment post-issue compared to pre-issue. Our results show that the disclosure of use of proceeds plays a significant role within the framework of agency issues and asymmetric information in SEOs.