Managerial Financial Education and the Valuation Effects of Seasoned Equity Offerings: Evidence from Taiwan

• Author: Mei‐Shih Chen,Xuan‐Qi Su,Ching‐Yen Chen,Chin‐Ming Chen
• Published date: 01 December 2019
• Date: 01 December 2019
• DOI: http://doi.org/10.1111/ajfs.12281

Managerial Financial Education and the

Valuation Effects of Seasoned Equity

Offerings: Evidence from Taiwan

Ching-Yen Chen

College of Finance and Banking, National Kaohsiung University of Science and Technology, Taiwan (ROC)

Xuan-Qi Su*

College of Finance and Banking, National Kaohsiung University of Science and Technology, Taiwan (ROC)

Chin-Ming Chen

College of Finance and Banking, National Kaohsiung University of Science and Technology, Taiwan (ROC)

Mei-Shih Chen

College of Finance and Banking, National Kaohsiung University of Science and Technology, Taiwan (ROC)

Received 11 January 2018; Accepted 3 October 2019

Abstract

This paper tests how managerial financial education explains the valuation effects of seasoned

equity offerings (SEOs). Using a sample of Taiwanese listed firms during 2007–2018, our results

show that investors react more negatively to SEO announcements by firms with more financially

educated managers (MFEMs). Such a negative effect is more pronounced for firms with a higher

information asymmetry and more earnings management. Further evidence indicates that SEO

firms with MFEMs are substantially overvalued and thus experience a significantly long-run

post-SEO underperformance. MFEMs are also found to reduce their ownership prior to SEOs.

Our overall results support the opportunism-based information advantage hypothesis.

Keywords Financial education; Seasoned equity offerings; Information asymmetry; Earnings

management; Overvaluation

JEL Classification: G32, G33, G34

1. Introduction

Substantial literature has documented that issuance of SEOs exhibits significant neg-

ative valuation effects on the stock performance of firms, including a negative

*Corresponding author: College of Finance and Banking, National Kaohsiung University of

Science and Technology, No. 1, University Road, Yanchao Dist., Kaohsiung City 824, Taiwan

(ROC). Tel: +886-(0)7-601-1000 #34016, Fax: +886-(0)7-601-1011, email: xqsu@nkust.edu.tw.

Asia-Pacific Journal of Financial Studies (2019) 48, 844–868 doi:10.1111/ajfs.12281

844 ©2019 Korean Securities Association

announcement-period abnormal return around the SEOs and long-run post-SEO

underperformance.

1,2

Consensus has been reached on the advantages of superior

information held by firm insiders vis-a-vis outsiders, that is, investors being the

most common explanation for this unfavorable valuation effect associated with

SEOs. Specifically, issuance of SEOs signals negative information content that lead-

ership insiders (e.g., top managers) are trying to issue overvalued equity because of

asymmetric information between insiders and outsiders, whereby outside investors

require a price discount when buying stocks at the time of the SEOs (Myers and

Majluf, 1984; Loughran and Ritter, 1997; D’Mello and Ferris, 2000; Lee and Masu-

lis, 2009). By extending the framework regarding the adverse selection of informa-

tion asymmetry proposed by the work of Myers and Majluf (1984) and other

influential studies, the present paper aims to examine whether and how managerial

financial education explains the valuation effects of SEOs.

Our study focuses on managerial financial education (e.g., educational profes-

sional backgrounds in finance, accounting, and business management) for two rea-

sons. First, motivated by the fact that general education attained by top managers

matters to a firm’s performance, managerial financial education is expected to be

even more helpful for various kinds of corporate policies and decision-making

behaviors. Accordingly, the importance of managerial financial education to corpo-

rate outcomes has attracted much research attention in recent years (Graham et al.,

2005; Malmendier and Tate, 2005; King et al., 2016). Second, because of lengthy

exposure to finance-related courses and training, top managers with financia l edu-

cation are expected to have a greater capacity to process information accurately

about their stocks’ perspective and therefore become better informed (Graham and

Harvey, 2001; Graham et al., 2005), which leads to a potential causality associated

with studies of the relation between managerial financial education and the valua-

tion effects of information asymmetry during SEOs.

We combine theories on the information content of SEOs with theories on the

valuation effects of managerial financial education to develop two competing and

testable hypotheses, namely, the information advantage hypothesis vis-

a-vis the

growth opportunity hypothesis. The information advantage hypothesis derives from

the potential role of managerial financial education in increasing the likelihood of

managerial opportunism in selling overvalued equity by taking superior information

about SEO firms’ prospects. Based on the information asymmetry hypothesis, man-

agers/insiders have more sources of information about firms, and well-informed

managers/insiders would only sell their stock shares when they believe the equities

1

Literature which suggests a negative price change on the stocks of firms immediately after

announcing SEOs includes, for example, Asquith and Mullins (1986), D’Mello and Ferris

(2000), and Heron and Lie (2004).

2

Literature which documents that firms making SEOs substantially underperform includes,

for example, Loughran and Ritter (1995), Foerster and Karolyi (2000), and Bessembinder and

Zhang (2013).

Managerial Financial Education and SEOs

©2019 Korean Securities Association 845