Seasoned Equity Offering and Agency costs

This paper explores the impact of Seasoned Equity Offering (SEO) on the Agency cost of companies using free cash flow and growth opportunities, and considering the cost of capital. Agency cost is an important indicator of the manager's behavior to protect the interests of owners and shareholders. To test the research hypotheses, we used tow sample of companies listed in Tehran Stock Exchange during the period of 2001-2018. The experimental sample includes companies that have seasoned equity offering and the control sample includes companies in the same industry but didn't have SEO. The experimental sample contains 1543 company-year observations and the control sample contains 1938 company-year observations. To test of hypotheses, we used multivariate linear regression models. Findings show that at the time of seasoned equity offering, companies with high free cash flow and low growth opportunities and companies with low free cash flow and high growth opportunities, despite the increase in free cash flow available to management, there is no change in their agency costs. This means that in proportion to the increase in the company's free cash flow, an increase in surveillance costs (agency costs) to monitor the manager's behavior to a certain extent is affordable. As a result, companies that raise capital from shareholders' claims and contributions, do not see a change in their agency costs when seasoned equity offering.