IPO Underpricing and Subsequent Seasoned Equity Offering

Several signaling models predict that firms underprice their initial offerings of equity deeply so that they can subsequently issue seasoned equity at more favorable terms. We test the implications of those models. We find a negative relation between IPO underpricing and the probability of and the size of subsequent seasoned equity offerings. While these results are inconsistent with the implications of the signaling hypotheses, the probability and size of subsequent seasoned equity offerings are more closely related to price appreciation achieved after IPO and to the external corporate governance variables. Those support market-feedback hypothesis raised by Jegadeesh, Weinsein, and Welch(19893) and stylized facts that aftermarket performance is more relevant to subsequent stock issue decisions.