Institutional Trading, Information Production, and the SEO Discount: A Model of Seasoned Equity Offerings THOMAS J. CHEMMANUR Carroll School of Management Boston College Chestnut Hill, MA 02467 chemmanu@bc.edu YAWEN J IAO Lally School of Management and Technology Rensselaer Polytechnic Institute 110 8th Street Troy, NY 12180 jiaoy@rpi.edu We develop a model of the seasoned equity offering (SEO) process, starting from the SEO announcement, through pre-offer trading, and ending in the offering itself. We use our model to advance a new rationale for the existence of the SEO discount and SEO underpricing, and to analyze the role of institutional investors in SEOs. We show that the SEO discount is positively related to the extent of information asymmetry a firm faces, and SEOs with greater pre- offer net buying by institutional investors have higher institutional allocations, greater oversubscription, and lower SEO discounts. Furthermore, our model predicts a positive link between the pre-offer net buying by institutional investors and the magnitude of SEO underpricing and the long-run post-SEO operating performance. 1. Introduction The discounting and underpricing of seasoned equity offerings (SEOs) have been extensively documented by the empirical literature (see, e.g., Corwin, 2003; Chemmanur et al., 2009). The SEO discount is defined as the difference between the issuing firm’s closing price on the last trading day prior to the offer day and its SEO offer price; SEO underpricing, on For helpful comments and discussions, we thank Shan He, Gang Hu, Debarshi Nandy, Xuan Tian, participants at the 2007 European Finance Association meetings, seminar participants at Boston College, and especially two anonymous referees and a coeditor. C  2011 Wiley Periodicals, Inc. Journal of Economics & Management Strategy, Volume 20, Number 1, Spring 2011, 299–338