Use of the Proceeds and Long-term Performance of French SEO Firms


  • The author acknowledges financial support from the Swiss National Fund for Scientific Research grant n°1214-49357.96 and from the Kraft Jacobs Suchard ‘Fonds de la recherche dans le secteur de l’économie’. I wish to thank Jean-François Bacmann, Guido Bolliger, Michel Dubois, Jean-François Gajewski and an anonymous referee for their helpful comments. I also thank the participants at the 1999 ‘Association Française de Finance’ meeting in Paris, the 2000 ‘European Financial Management Association’ meeting in Athens and the 2003 ESA research seminar in Grenoble.


This paper examines the long-term stock performance of French SEO with rights by looking at the intended use of the proceeds. Firms that raise equity for pure capital structure motives are separated from the ones that use the SEO proceeds to finance specific investment projects. Issuers in the first category are concerned about preserving their financial flexibility and they are expected to evolve in a capital structure irrelevancy framework. On the other hand, issuers in the second category are more inclined to be sensitive to adverse selection problems or agency conflicts and thus, they should be more exposed to under-reaction on the long-run. According to a matching firm methodology, ‘Financing New Investment’ issuers underperform their benchmark at a rate of 4% to 8% per year over a 36-month horizon while ‘Capital Structure’ issuers do not show any abnormal performance. These results are robust according to alternative Beta pricing models. In addition, managers of both issuer's types time the SEO after a period of positive abnormal performance in order to sell overpriced securities. However, only the ‘Financing New Investment’ sample experiences a performance reversal; the abnormal returns decreasing gradually from the issue on, to become significantly negative 24 months after the event.