How Can Managers Anticipate Future Stock Overvaluation?

Abstract

The average Chinese SEO is executed about one year after the initial announcement due to regulative screening. Although overvaluation at the announcement is not necessary for market timing, we find a significant stock price run-up and reversal surrounding SEO announcements, which are consistent with US findings. We also find stock prices are overvalued over four years preceding the announcement. These results suggest that Chinese firms announce SEOs following persistent overvaluation and additional stock price run-ups. The market price at execution is also overpriced, suggesting that market timing is an important motive for Chinese SEOs. We argue that regulative screening makes market timing difficult and accordingly Chinese managers are moderate in public seasoned equity offerings.