Assume that a firm has just announced that it will do a Seasoned Equity Offering in the near future

Finance Dec 19, 2020

Assume that a firm has just announced that it will do a Seasoned Equity Offering in the near future. The market generally interprets this as a negative signal about the quality of the firm and the stock price will jump down by 2% to 3% on average. True or False?

Expert Solution

This is true. Seasoned equity offerings being sold by the firm itself are usually interpreted as a sign the firm might have weak financials. Either way, when the firm offers new shares it will certainly dilute the price per share of the stock. Seasoned equity offerings can be offered by existing shareholders, which are not necessarily a negative signal and do not dilute the price per share.

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