Seasoned Equity Issuers' R&D Investments: Signaling or Overoptimism

Document Type


Department or Administrative Unit


Publication Date

Winter 2012


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.


This article was originally published in The Journal of Financial Research. The full-text article from the publisher can be found here.

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Journal of Financial Research


© 2012 The Southern Finance Association and the Southwestern Finance Association