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The Impact of Cost of Equity on Seasoned Equity Offerings

This paper provides an empirical link between the expected cost of equity and firms’ Seasoned Equity Offerings activities, using a novel measure of forward-looking cost of equity. There is a negative impact of expected cost equity on SEO likelihood and amount of proceeds, exists on both market and firm level. Empirical evidence suggests that the negative SEO announcement effect and post-SEO long run return is more consistent with the investment opportunity explanation rather than market timing. Firms issuing SEOs when they have high forward-looking cost of equity experience more negative announcement reaction and followed by worse long run post-SEO performance. Consistently, when the cost of equity is higher, firms receive stronger negative reaction during their SEO announcement if they are distressed. These firms are also more likely to pay back their debt one year after the issuance.