The Investigation of the Dual Impact of the SEO Announcement on the Abnormal Returns: Using Options to Analyze the Information Revealed

In this research we have proposed a modification of the established theoretical framework for analysis of the market's reaction to the seasoned equity issue announcement. In particular, an intermediary step was introduced in order to solve the problem of unidentified limits for positive project's NPV. Based on the results of other researches, we have incorporated option trading data as additional market information on the stock's probable intrinsic value (as perceived by the investors) prior to the announcement. As for the empirical results, we have shown that the assets valuation (or current company's value) is prevailing in determining the impact on price behavior both in terms of absolute values and variability. Although the new prospects are less influential, their significance rises as the speculative nature of investments grows (measured in terms of price-to-earnings multiple for the stocks). Contrary to the initial expectations, a more pronounced negative reaction to the secondary equity issues is associated not with overoptimistic valuation of assets, but with feeble growth prospects of the company (up to negative value for the use of the proceeds). Several areas for potential improvement were defined. Expanding the set of information about not only company-specific, but also industry-wide characteristics may improve reflection of the market's view on connected events.