Insider signaling and seasoned equity offerings

Abstract

PurposeThe purpose of this paper is to examine the impact of insider ownership decreases on stock returns for firms undergoing seasoned equity offerings (SEOs).Design/methodology/approachInsider data were gathered for firms undergoing SEOs and this information used to compute the insider ownership percentage decreases caused by the SEOs. These insider percentage decreases and standard compounded abnormal return methodology were used to test signaling theory.FindingsIt was discovered that the short‐run and long‐run stock returns accompanying SEOs are not consistent with what signaling theory predicts. In particular, for greater decreases in insider ownership percentages, a superior market response for both short‐run tests and long‐run post‐SEO tests was often found.Research limitations/implicationsPrior research has not examined how the change in insider ownership caused by a corporate event influences stock returns. Future research can build on the univariate tests by examining the impact of insider ownership within a multivariate framework.Practical implicationsInvestors cannot profit by following the behavior of insiders by selling shares in companies where insiders lower their ownership percentages. This is because insiders appear to have personal agendas that they follow when decreasing their holdings.Originality/valueThis is the first study to examine how changes in insider ownership caused by a significant corporate event affect stock returns. The findings of this empirical examination challenge signaling theory as regards insider knowledge, the ability of insiders to convey their privileged knowledge (if it exists), and the capacity of outsiders to decipher and act on insider actions.

IPO valuation and insider manipulation of R&D

“…Our findings for INS and RIN do not always agree with the seasoned equity offering (SEO) research. In particular, the univariate research (Hull et al , 2010) and multivariate research (Hull et al , 2012) find that decreases in insider ownership brought about by the SEO are not associated with negative long‐run returns.…”

Seasoned Equity Offerings and Differences in Share-Price Impact by Firm Categories

“…Eckbo et al (2007) confirmed this effect for the US market (see also Golubov et al 2015). The general negative link of SEOs was also found by, for example, Gerard and Nanda (1993) for the US; Huang et al (2016) for China; and Naveen Kumar et al (2018) for India (see also Baker and Xuan 2016;Bond and Zhong 2016;Brisker et al 2014;Hull et al 2009;Masulis and Korwar 1986).…”

“…That effect was confirmed in the context of acquisition financing by SEOs (Golubov et al 2015). Other studies have concluded that companies face abnormally low stock returns after the issuance of SEOs, specifically for common stocks (Baker and Xuan 2016;Brisker et al 2014;Hull et al 2009;Masulis and Korwar 1986). Regarding the stock return after the announcement of an SEO, Eckbo et al (2007) identified a negative effect for US firms.…”