• We are grateful to Hsuan-Chi Chen, Jie He, Ronald Masulis, Dennis Sheehan, and conference participants at the 2009 Financial Management Association annual meeting and 2009 Eastern Finance Association annual meeting for their helpful comments. We also thank Scott Hein, Jayant Kale, Jeff Mercer, and Drew Winters (editors) and an anonymous referee, whose insightful comments and suggestions have greatly improved the paper. Hong Qian acknowledges the financial support from Faculty Research Fellowship at Oakland University. Zhaodong (Ken) Zhong appreciates the support from the David Whitcomb Center for Research in Financial Services at the Rutgers Business School.


It is well known that investors often react negatively to the announcements of seasoned equity offerings (SEOs). We posit that issuers can use positive discretionary (higher than expected) R&D investments before the SEO to signal their investment prospects to mitigate the negative announcement effect. Alternatively, positive discretionary R&D may be attributed to managerial overoptimism about future returns of R&D investments. We find strong support for the signaling hypothesis among high-tech issuers: investors respond more favorably to the SEO announcements of high-tech issuers with positive discretionary R&D; these issuers are more likely to use new capital in future R&D and they produce better post-SEO operating performance. In contrast, we find some evidence of managerial overoptimism among low-tech issuers: investors tend to penalize low-tech firms with positive discretionary R&D at SEO announcements; they are more likely to hold new capital as cash and they fail to produce better post-SEO operating performance.