Literature Review Chapter: Seo This Literature Review Looks

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[. . .] He found that the company itself and its industry were larger determinants of future growth than anything other factor. In his conclusion, Klimaz (2000) talked about the limitations placed on researchers and their inability to adequately study the firms many times. He saw this as a problem as did many other researchers (Clark, Dunbar & Kahle, 2001; Dawson, 1987; McDonald & Jacquillat, 1974).

Despite the issues common to researchers, there is the problem of actual firm underperformance and the reasons it exists. The crux of this paper is SEOs, but it is interesting how the performance of seasoned issues closely mirrors that of initial issues of stock. Speiss and Afleck-Graves (1995) analyzed 1274 firms that had issued stock between 1975 and 1989. They found that "the median return for seasoned equity offerings was measured at 10% while the return for non-issuing firms was 42.3%. It was suggested that underperformance is due to miscalculation of relative risks." This miscalculation of risk is another primary reason for the degradation of growth over the long-term. Many risks are involved in the calculation of potential, and firms that do not properly account for problems seem to be doomed to experience slow or negative growth.

One of the most persistent risks that a company endures is that of the people who are chosen to lead the organization (Xiaozhou, Jin & Hong, 2008). China has been used as a testing ground for this issue because businesses follow the Japanese model which is considered more rational than behavioral, and because the companies are emerging both in terms of growth and management (Xiaozhou, Jin & Hong, 2008). In studies conducted with Chinese and Japanese companies, the quality of leadership has been found to be the most important variable with regard to the success of an SEO or its failure (Su & Fleisher, 1997). This seems to be due to culture, but it is a fact that has been mirrored in many Western studies also.

CEO Performance Relative to SEO Performance

The overriding issue for this paper remains whether small firms are more effected by a seasoned equity offering as opposed to physically and fiscally larger firms. Many of the studies examined have concluded that it matters little what the size of the firm is, everyone will underperform its expectations whether that be for an IPO or an SEO (in a large sample of firms). However, this conclusion does not tell whether the leaders of the company can help their firm perform better during these issues when large firm performance is compared to small. The fact is that this does matter according to the research. Large firms seem to experience a smaller degree of underperformance as compared to smaller firms. The reason for this underperformance is generally found to be in the planning and understanding of the equity issue.

Generating capital is needed whether a company be large or small, but it may be more important for a smaller company. A larger firm may require more capital to push projects forward, but they generally have a larger margin between success and complete failure. McLaughlin, Safieddine and Vasudevan (2000) examined CEO reputation as it related to the success or failure of an issue. They found that it had made a great deal of difference mainly because investors needed to trust the person in charge of the SEO. The study was conducted primarily with investment bankers (which may have slightly skewed the results as the authors admit because of the relatively poor reputation that most have now) who were involved in either producing new products or were central to a separate firm's deciding whether to initiate a seasoned offering or not. Since the banker was seen as a senior member of the planning team, it mattered a great deal whether the individual had a tainted reputation or not. Firms that operated with someone who had ethical issues in past dealings were less likely to meet projections than those who used a banker with no reputational issues (McLaughlin, Safieddine & Vasudevan, 2000). Another study found that a firm that had prior financial issues, whether they were recent or not, could seriously effect an IPO or SEO (Weiss, 1990). The author looked specifically at bankruptcies, and many respondents saw the practice as a breach of trust between the company's leaders and the investors (Weiss, 1990). It was very difficult for the firms involved in bankruptcy to reacquire a reputation good enough that investors were willing to consider them a good risk.

The entire discussion revolves around what risk the investor is willing to take, and that is where the size of the firm matters. Larger firms are seen as longer lasting and more stable due to their size (this is a general statement an acknowledged as such by the author of the study (Phillips, 1989)). Smaller firms do have more issues initially because they have to prove to companies that they have the ability to overcome the deficit of lower operating capital (Kiymaz, 2000). In one study, Cudd, Eduardo and Roberts (2008) discovered that much of the reluctance of investors, and the actual underperformance, was due to poorer decision making on the part of smaller firms. The authors concluded that the smaller firms could have actual better quality decision makers in place, but they were downgraded by investors because of the lack of people to make decisions. This led, in part, that the firms experienced.

Conclusion

The size of the firm does not matter according to the research, almost invariably, firms underperform the financial expectations of either an IPO or and SEO. The reasons for this seem to be poor planning, competency of leadership, and adequate benchmarks used to make the projections. However, smaller firms underperformed to a slightly larger degree because of the undeserved reputation smaller businesses get in relation to those that are larger.

References

Abhyankar, A., & Ho, K.-Y. (2001). Is long-horizon abnormal performance after seasoned equity offerings illusory? New evidence from the UK. Retrieved from http://www.fin.ntu.edu.tw/~conference2002/proceding/3-1.pdf

Brau, J.C., Brown, R.A., Osteryoung, J.S. (2004). Do venture capitalists add value to small manufacturing firms? An empirical analysis of venture and non-venture capital-backed initial public offerings. Journal of Small Business Management, 42(1).

Brau, J.C., & Osteryoung, J.S. (2001). The determinants of successful micro-IPOs: An analysis of issues made under the small corporate offering registration (SCOR) procedure. Journal of Small Business Management, 39(3).

Brav, A., Michaely, R., Roberts, M., & Zarutskie, R. (2009). Evidence on the tradeoff between risk and return for IPO and SEO firms. Financial Management, 38(2).

Chemmanur, T.J., Paeglis, I., & Simonyan, K. (2010). Management quality and equity issue characteristics: A comparison of SEOs and IPOs. Financial Management, 39(4).

Clarke, J. Dunbar, C., Kahle, K.M. (2001). The long-run performance of secondary equity issues: A test of the windows opportunity hypothesis. JEL.

Cornett, M.M., Mehran, H., & Tehranian, H. (1998). Are financial markets overly optimistic about the prospect of firms that issue equity? Evidence from voluntary vs. involuntary equity issuances by banks. The Journal of Finance, 53(6), 2139-2149.

Cudd, M., Eduardo, M., & Roberts, L. (2008). Short-cuts in issuance decisions and subsequent small firm performance. Journal of Economics & Finance, 32(3).

Dawson, F.A. (1987). Initial public offer underpricing: The issuer's view -- A note. The Journal of Finance, 42(1), 159-162.

Erdogan, A.I. (2010). The long-run performance of initial public offerings: The case of Turkey. European Journal of Economics, Finance and Administrative Sciences, 26, 57-64.

Finkle, T.A. (1998). The relationship of board of directors and initial public offerings in the biotechnology industry. Entrepreneurship: Theory & Practice, 22(3).

Ibbotson, R.G., Sindelar, J.L., & Ritter, J.R. (1994). The market's problem with the pricing of initial public offerings. Journal of Applied Corporate Finance, 66-74.

Jegadeesh, N. (2000). Long-term performance of seasoned equity offerings: Benchmark errors and biases in expectations. Financial Management, 29(3).

Kiymaz, H. (2000). The initial and aftermarket performance of IPOs in an emerging market: Evidence from the Istanbul stock exchange. Journal of Multinational Financial Management, 10, 213-227.

Levis, M. (1993). The long-run performance of initial public offerings: The UK experience 1980-1988. Financial Management, 22(1).

Li, M. (2012). Value premium: Value or arbitrage risk? Journal of International Finance and Economics, 12(1).

Li, Y., & Ong, S.E. (2007). Market timing behavior of the second equity offerings of REITs. Retrieved from http://www.prres.net/papers/Li_Market_timing_behaviour_seconday_equity_REIT S.pdf

Loughran, T., & Ritter, J.R. (1997). The operating performance of firms conducting seasoned equity offerings. Retrieved from http://bear.warrington.ufl.edu/ritter/ritopweb.pdf

Loughran, T., Ritter, J.R., & Rydqvist, K. (1994). Initial public offerings: International insights. Pacific-Basin Finance Journal, 2, 165-199.

McDonald, J.G., & Jacquillat, B.C. (1974). Pricing of initial equity issues: The French sealed-bid auction. The Journal of Business, 47(1), 37-47.

McLaughlin, R., Safieddine, A., & Vasudevan, G.K. (2000). Investment banker reputation and the performance of seasoned equity issues. Financial Management, 29(1).

McLaughlin, R., Safieddine, A., & Vasudevan, G.K. (1996). The operating performance of seasoned equity issues: Free cash flow and post-issue performance. Financial Management, 25(4).

Nau, R. (2008). Asset pricing theory. Duke: The Fuqua School… [END OF PREVIEW]

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Seo This Literature Review Looks.  (2012, August 31).  Retrieved June 16, 2019, from https://www.essaytown.com/subjects/paper/seo-literature-review-looks/5914447

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