Management Guidance and the Underpricing of Seasoned Equity Offerings

Abstract

We argue that management guidance on firms’ future earnings and other financial information serves to alleviate information asymmetry around seasoned equity offerings (SEOs), thus reducing the magnitude of SEO underpricing. Controlling for its endogeneity, we find that management guidance reduces the magnitude of SEO underpricing, especially for smaller firms. Further, the effect of guidance on SEO underpricing is driven by firms issuing guidance that is more accurate or more precise. We contribute to the extant literature on both SEOs and voluntary disclosure by providing evidence that voluntary disclosure reduces the magnitude of SEO underpricing and that this effect varies with disclosure quality.

Keywords: management guidance, seasoned equity offerings, underpricing, cost of capital

JEL Classification: G32, M41, G14