The Effect of Media Coverage on the Pricing of Seasoned Equity Offerings

• Date: 01 September 2019
• Published date: 01 September 2019
• Author: Cristian A. Pinto‐Gutiérrez
• DOI: http://doi.org/10.1002/cjas.1504

The Effect of Media Coverage on the Pricing of

Seasoned Equity Offerings

Cristian A. Pinto-Gutiérrez*

University of Connecticut

Abstract

This paper examines the role of media coverage and investor

attention on the outcomes of seasoned equity offerings

(SEOs). I use an archive of Thomson Reuters news articles

to proxy for f‌irm visibility and investor attention. I f‌ind that

the volumes of news articles prior to the offerings are

positively associated with the offer price discounts of SEOs.

Furthermore, the volumes of news articles are negatively

associated with the cumulative abnormal returns three days

around the SEOs. I conclude that the costs of equity increase

with media coverage prior to SEOs. Overall, the evidence is

consistent with the hypothesis that media coverage affects

investors’information processing in SEOs. Copyright ©

2018 ASAC. Published by John Wiley & Sons, Ltd.

Keywords: media coverage, investor attention, seasoned

equity offerings, news analytics

L’auteur de cet article examine l’inf‌luence que la couverture

médiatique et l’attention des investisseurs exercent sur les

résultats des offres d’actions sûres (SEO). Il utilise une

archive d’articles de presse de Thomson Reuters pour

évaluer la visibilité de l’entreprise et l’attention des

investisseurs. Les résultats montrent que les volumes

d’articles de presse publiés avant les offres sont

positivement associés aux rabais des prix d’offre de SEOs.

De plus, les volumes d’articles de presse sont associés

négativement aux retours anormaux cumulatifs de trois

jours autour des SEOs. L’auteur en conclut que les coûts

des actions augmentent avec la couverture médiatique qui

précède les SEOs. Dans l’ensemble, les données probantes

sont conformes à l’hypothèse selon laquelle en matière de

SEOs, la couverture médiatique inf‌lue sur le traitement de

l’information des investisseurs. Copyright © 2018 ASAC.

Published by John Wiley & Sons, Ltd.

Mots-clés: couverture médiatique, attention des

investisseurs, offres d’actions sûres, analyse des nouvelles

Introduction

Attention is a scarce cognitive resource (Kahneman,

1973), and investors cannot maintain perfect attentiveness

to all trading opportunities (Duff‌ie, 2010). In this paper, I

use recent advances in news analytics to examine the effect

of investor attention on both the pricing and short-term

returns of seasoned equity offerings (SEOs).

1

I provide evi-

dence that investor attention may explain some of the

observed empirical irregularities in the SEO market. These

anomalies include high SEO offer price discounts and

negative short-term abnormal returns.

Theoretical and empirical papers have provided differ-

ent explanations for these negative SEO effects. Scholars

propose that the reasons for SEO discounts include compen-

sation to investors for uncertainties regarding the value of

issuers, price pressure effects, agency problems between

underwriters and f‌irms, and underwriters’price practices,

among others (for instance, Altinkilic & Hansen, 2003;

Corwin, 2003). Meanwhile, scholars most frequently cite two

explanations for the negative market reaction to SEOs. They

point to the adverse selection problem of Myers and Majluf

(1984), where rational investors interpret an equity issuance

to be management’s signal that the stock is overvalued; they

also note the theoretical arguments of Jung, Kim, and Stulz

(1996), who suggest that investors react negatively to SEOs

because they are concerned about the misuse of the proceeds.

Several studies have also shown that issuers can reduce

these negative effects associated with SEOs by using

I would like to thank my advisor James W. McFarland from the A. B.

Freeman Business School at Tulane University, and two anonymous ref-

erees for their comments. I am also indebted to the participants of the

2015 Finance Brown Bag Seminar at Tulane University and to seminar par-

ticipants at the Universidad del Desarrollo, Chile. I would like to acknowl-

edge the f‌inancial support of the Government of Chile and the National

Commission for Scientif‌ic and Technological Research (CONICYT)

through the Bicentennial Becas-Chile Scholarship, which allowed me to un-

dertake Ph.D. studies.

*Please address correspondence to: Cristian A. Pinto-Gutiérrez, School of

Business, University of Connecticut, 2100 Hillside Road, Unit 1041, Storrs,

CT 06269-1041. Email: cristian.pinto-gutierrez@uconn.edu

Canadian Journal of Administrative Sciences

Revue canadienne des sciences de l’administration

36: 432–449 (2019)

Published online 19 June 2018 in Wiley Online Library (wileyonlinelibrary.com) DOI: 10.1002/CJAS.1504

Can J Adm Sci

36(3), 432–449 (2019)Copyright © 2018 ASAC. Published by John Wiley & Sons, Ltd. 432

marketing efforts to capture investors’attention and expand

their investor base before the offerings. To measure the

effects that investor attention has on the issuers’short-run

demand curves, these studies employ several proxies for

investor attention. For example, to measure underwriters’

marketing efforts, Gao and Ritter (2010) use the issuing

f‌irms’offer method choices (accelerated SEOs or fully

marketed SEOs), and Huang and Zhang (2011) use the num-

ber of underwriters for the SEOs. Meanwhile, to measure the

attention of retail (or individual) investors, Lu, Holzhauer,

and Wang (2014) use the pre-issue search frequency tool

in Google. Overall, these studies conclude that investor

attention and offer price discounts substitute for each other.

In this paper, I explore a new measure of investor

attention and f‌ind contrasting results. To measure investor

attention, I calculate the amount of f‌irm-specif‌ic news items

in a recently developed news analytics product called the

Thomson Reuters News Analytics (TRNA). TRNA is a

machine-readable service that contains all news published

by Reuters or represented companies themselves (through

newswire services) from January 2003 onwards. The advan-

tage of this dataset is that it contains news articles and press

releases that have appeared on the screens of traders; there-

fore, it may be a better and more direct source of data to

proxy for the information arrival rates to professional traders

than other news databases. It should also be superior to

indirect measures that previous literature has used to

measure attention.

I begin my investigation by examining whether investor

attention before SEOs is signif‌icantly associated with SEO

discounts (def‌ined as negative returns from the previous

day’s closing transaction prices to the offer prices). I f‌ind

that the number of news articles 90 days prior to the SEOs

offer dates positively impacts discounting levels. To explain

this result, I propose a model that shows that f‌irms need to

compensate institutional investors for the large adverse mar-

ket reactions to SEOs that investors expect when f‌irms make

the offers public. In the model, institutions act as specialists

and resell all or a fraction of their allocations of shares to

retail investors in the aftermarket. If investors of high-me-

dia-coverage f‌irms are paying close attention to the compa-

nies’information prior to the offerings, their reactions will

be strongest when f‌irms issue new equity and thereby when

f‌irms’managers signal that the stocks are overvalued. There-

fore, to entice institutional investors into the market for the

SEOs, issuers with high media coverage will have to set

low offer prices, resulting in high offer price discounts.

Consistent with my previously established investor

attention explanation for the pricing of SEOs, I also f‌ind

that the cumulative abnormal returns over the interval of

(-1 to +1) days around the issuances are statistically and

negatively related to the number of news articles 90 days

prior to the offerings. This result indicates that f‌irms with

high levels of investor attention that offer new equity expe-

rience a large decline in their stock prices at the issuances.

Although scholars have explored investor attention as

a potential determinant of the pricing of SEOs, the role

that business media coverage, as a proxy for attention,

has on SEO outcomes is largely unexplored in the f‌inan-

cial literature. I augment the literature on SEO pricing by

introducing and testing a f‌irm-specif‌ic measure of investor

attention based on a novel database of news articles from

Thomson Reuters. TRNA contains news articles that ap-

pear on the screens of traders; therefore, it may be a better

and more direct source of data to proxy for information ar-

rival rates to investors compared to the indirect measures

of attention used by previous literature, such as the

number of underwriters for the SEOs (Huang & Zhang,

2011) and the user search frequency in Google before

the offering (Lu et al., 2014). In fact, my empirical results

contradict those of Huang and Zhang (2011), who f‌ind

that increased investor attention prior to SEOs arises from

the additional marketing efforts of underwriters f‌lattens the

demand curves of the issuers, and thereby decreases offer

price discounts. My results also contradict a source of re-

tail investor attention proposed by Lu et al. (2014) based

on users’Google searches. They f‌ind that pre-issue retail

investor attention is negatively related to offer price

discount. In contrast, I f‌ind that high levels of pre-SEO

investor attention are positively related to the offer price

discounts. These discounts compensate investors for broad

negative reactions to the SEOs that they expect when

reselling their shares to retail investors that are more atten-

tive to management signals that the stocks are overvalued.

As the discount is negotiated between institutions and

f‌irms, I believe that institutions’anticipation of the market

reaction to the offering is more likely based on the amount

of f‌irm-specif‌ic public news that professional traders

receive electronically in real time than on other indirect

measures that previous literature has used to measure

attention.

I structure the remainder of the paper as follows. First, I

provide a literature review and develop the hypotheses.

Second, I present the datasets used in the empirical analysis.

Third, I describe the econometric methodology and mea-

sures for investor attention and control variables, and estab-

lishes the key empirical results. The last section contains a

summary and concluding remarks.

Related Literature and Hypothesis Development

In the sparse literature on the effects of investor atten-

tion on SEO outcomes, the overall conclusion seems to be

that investor attention before issuances f‌lattens the short-

run demand curve for the issuing f‌irm’s stock, thereby

reducing the adverse effects of SEOs. For instance, Gao

and Ritter (2010) use the issuing f‌irms’offer method choices

(accelerated SEOs or fully marketed SEOs) to study the

effects that underwriting marketing efforts prior to issuances

MEDIA COVERAGE AND SEASONED EQUITY OFFERINGS PINTO-GUTIERREZ

Can J Adm Sci

36(3), 432–449 (2019)Copyright © 2018 ASAC. Published by John Wiley & Sons, Ltd. 433