The Founder certification effect, firm disclosures, and the cost of SEO financing

Abstract

We investigate the effect of founder control on firms’ financing costs for seasoned equity offerings (SEOs). Firms issuing SEOs are subject to increased information asymmetry and associated agency conflicts. We hypothesize that founder control has a certification effect that mitigates such problems, and consequently, reduces the cost of issuing SEOs. Consistent with our prediction, firms with founder control enjoy higher abnormal announcement returns and lower SEO gross spreads. We also show that founder firms have better post-SEO operating performance than non-founder firms. Additionally, we document that the founder certification effect is more salient among firms with poorer pre-SEO operating performance and those that do not disclose specific use of the SEO proceeds. Finally, we show that founder firms do not increase the frequency of management earnings forecasts as much as non-founder firms prior to the SEO. Our results are robust to a battery of sensitivity analyses, and our conclusions are consistent with the founder certification effect.