Confidential marketing in seasoned equity offers

Confidentially marketed public offers (CMPOs) represent a popular innovation in the market for seasoned equity offers (SEO) despite large negative announcement reactions. We find that CMPOs are often used by small firms with negative operating cash flows to raise a relatively substantial amount of capital, which is used largely for R&D intensive investments. We argue that the confidential marketing associated with CMPOs has made them a popular way for small firms to make fast-paced public offers, which are known to have reduced price pressure, while sidestepping the problem of inelastic demand. These firms are willing to trade off more negative announcement reactions for the chance to privately assess their prospects for raising capital.