Historical high prices and seasoned equity offerings: evidence from China

Abstract

Purpose

We are the first to investigate the relationship between seasoned equity offerings (SEOs) and anchoring on historical high prices in China.

Design/methodology/approach

We use the ratio of the recent closing price to its historical high in the previous 12–60 months (anchoring-high-price ratio) to study its impact on the market timing of SEOs.

Findings

Empirical results show that the anchoring-high-price ratio significantly and positively affects the probability of additional stock issuances. Contrary to the USA market, the Chinese stock market reacts negatively to the SEOs at historical highs. Moreover, the anchoring-high-price ratio exacerbates the negative effect of announcements and leads to long-term underperformance. Finally, we investigate the impact of the anchoring-high-price ratio on a company’s capital structure, showing that the additional issuance anchoring on historical highs reduces the company’s leverage ratio in the long run. Overall, our findings support the anchoring theory and can help understand better the anchoring behavior of managers and the company’s decision on additional stock issuances.

Originality/value

We are the first to use the anchoring-high-price ratio to study the timing of SEOs. We find that the anchoring-high-price ratio positively affects the probability of SEOs. Unlike the USA, the Chinese stock market reacts negatively to SEOs at high prices. SEOs anchoring on historical highs reduce a firm’s leverage ratio in the long run. Finally, our results support the anchoring theory.

Citation

Xia, Y. and Guo, S. (2024), "Historical high prices and seasoned equity offerings: evidence from China", China Finance Review International, Vol. ahead-of-print No. ahead-of-print. https://doi.org/10.1108/CFRI-10-2023-0259