Investor recognition and seasoned equity offers

We find that seasoned equity issuers who pay more in underwriting costs are associated with larger improvements in investor recognition, greater contemporaneous increases in firm value, and larger declines in illiquidity risk. We identify increased analyst following as an important channel through which these effects occur. The results are consistent with the prediction of Merton (1987) and imply that an equity issuing firm can actively manage its degree of investor recognition and thereby influence its valuation. Furthermore, equity issuers associated with greater improvements in investor recognition exhibit significantly more negative multi-factor alphas during the three years after issuance, suggesting that improved investor recognition can partially explain the appearance of post-issue stock underperformance.