Do Firms Knowingly Sell Overvalued Equity?

Lee, Inmoo

doi:10.2307/2329442

Cited by 147 publications

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“…Other studies find similar underperformance following seasoned equity offerings (SEOs) (e.g., Loughran and Ritter, 1995;Spiess and Affleck-Graves, 1995;Lee, 1997; and Burch et al, 2004). See also Chen and Liang, 2006, who find evidence of market timing ability in hedge funds, especially in bear and volatile markets.…”

Section: Motivationmentioning

confidence: 83%

“…To ascertain the impact of issuance on prior and subsequent returns, it is imperative that the time period be matched carefully to ensure that the correct period is being measured. We follow Henderson et al (2006) by using monthly issuance data and calculate returns (in our case, quarterly) using a geometric (1997;1998) andLa Porta et al (2006). Investment profile indices are derived from International Country Risk Guide's Investment Profile, which is a component that makes up their political risk index.…”

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confidence: 99%

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Information Asymmetry and the Timing of Capital Issuance: An International Examination

Knill

Lee

2011

SSRN Journal

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Using issuance data across 50 countries from 1996 through 2009, we examine the role of information asymmetry in market timing globally. We utilize a model that takes into account the possible feedback of security issues to past market returns allowing us to ascertain whether timing of capital issuance around the world is based on information asymmetry. We find evidence of both market timing and pseudo market timing. The evidence for market timing is significantly stronger in international sub-samples with greater levels of information asymmetry when capital issuance is measured by equity share. The evidence for pseudo market timing is consistent across sub-samples when capital issuance is measured by changes in equity issuance. These results suggest that information asymmetry in a market plays an important role in the ability of managers to time capital issuance and that counter to the implications of extant literature, market timing and pseudo market timing are not mutually exclusive, i.e., existence of one does not nullify the other. JEL classification: C53, G14, G15, G32, Key words: equity issues, market timing, information asymmetry, international evidence AbstractUsing issuance data across 50 countries from 1996 through 2009, we examine the role of information asymmetry in market timing globally. We utilize a model that takes into account the possible feedback of security issues to past market returns allowing us to ascertain whether timing of capital issuance around the world is based on information asymmetry. We find evidence of both market timing and pseudo market timing. The evidence for market timing is significantly stronger in international sub-samples with greater levels of information asymmetry when capital issuance is measured by equity share. The evidence for pseudo market timing is consistent across sub-samples when capital issuance is measured by changes in equity issuance. These results suggest that information asymmetry in a market plays an important role in the ability of managers to time capital issuance and that counter to the implications of extant literature, market timing and pseudo market timing are not mutually exclusive, i.e., existence of one does not nullify the other. JEL classification: C53, G14, G15, G32, Key words: equity issues, market timing, information asymmetry, international evidence2 Market timing and pseudo market timing theories differ fundamentally with respect to whether market efficiency holds or not 1 and thus the literature implicitly assumes that market timing and pseudo market timing are mutually exclusive ideas; proof of the existence of one nullifies the existence of the other. Given the important role that information asymmetry plays in market timing, however, it makes sense that the level of information asymmetry in a market would affect the likelihood that market timing could occur. Depending on the relative information asymmetry in a given nation, managers may not be able to exploit their superior knowledge. Conversely, in pseudo market timing, wh...

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Section: Motivationmentioning

confidence: 83%

mentioning

confidence: 99%

Information Asymmetry and the Timing of Capital Issuance: An International Examination

Knill

Lee

2011

SSRN Journal

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“…Meanwhile, insider trading before announcing new security issue is correlated with stock price changes. Lee (1997) suggests that the true value of the firm based on informational asymmetry between insiders and outside investors could be observed by insiders trading pattern. If managers with superior information about the firm sell overvalued equity, market could regard as managers to be net sellers.…”

Section: Insider Tradingmentioning

confidence: 99%

Insider Trading and the Classification of Seasoned Equity Offerings: Evidence from Taiwan

Huang¹,

Chiu²

2017

IJEF

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This paper investigates whether insider purchasing or selling before Season equity offerings (SEO) announcement have the impact on the cumulative abnormal returns (CAR) around SEO announcement in Taiwan. We find that there are negative announcement effects around the SEO announcement, which is not consistent with the argument that there are usually positive announcement effects around the SEO announcement in Taiwan. Moreover, long-run abnormal returns following SEOs are negative. Therefore, the motivation of SEO has changed from investment to overvaluation.. Although there is net buying prior to SEO announcement, the outside investors still regard SEO announcement as a signal of overvaluation instead of growth potential.

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“…First, this paper uses insider trading prior to the announcement of equity-selling mechanisms to measure the other insiders' decision. This is because most studies indicate signi cant changes in insider trading patterns before equity-offering announcement (Karpoff and Lee (1991), Kahle (2000), Clarke, Dunbar, and Kahle (2001), Lee (1997)) and researchers have concluded that insider trades reveal important non-public information (John and Mishra (1990), Damodaran and Liu (1993), Seyhun (1986), Meulbroek (1992)). Second, this paper uses both the two-stage estimation approach and the conditional correlation approach.…”

Section: Introductionmentioning

confidence: 99%

Alternative Econometric Methods for Information-based Equity-selling Mechanisms

Lee¹,

2010

Handbook of Quantitative Finance and Risk Management

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Extant research offers mixed empirical results on the information content of private placements. Hertzel and Smith (1993) suggest that, on average, private placement rms are undervalued. On the other hand, Hertzel, Lemmon, Linck, and Rees (2002) show that private placement rms experience signi cant negative long-run post-announcement stock price performance and that high levels of capital expenditures around private placement re ect managerial overoptimism. Empirical work examining the information content of private placements typically takes the approach based on proxies for information asymmetry that suffers the intrinsic errors-in-variables problem. This paper circumvents the empirical dif culty by developing the two-stage estimation approach and the conditional correlation approach. The conditional correlation coef cient varies between -1 and +1 that allows comparisons across samples feasible. Thus, it prevails over the two-stage estimation approach to identify the signi cance of the information content of equity-selling mechanisms.

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Do Firms Knowingly Sell Overvalued Equity?

Cited by 147 publications

References 0 publications

Information Asymmetry and the Timing of Capital Issuance: An International Examination

Information Asymmetry and the Timing of Capital Issuance: An International Examination

Insider Trading and the Classification of Seasoned Equity Offerings: Evidence from Taiwan

Alternative Econometric Methods for Information-based Equity-selling Mechanisms

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