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Insider signaling and seasoned equity offerings

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Author Info

  • Robert M. Hull
  • Sungkyu Kwak
  • Rosemary L. Walker
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    Abstract

    Purpose – The 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/approach – Insider 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. Findings – It 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/implications – Prior 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 implications – Investors 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/value – This 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.

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    File URL: http://www.emeraldinsight.com/journals.htm?issn=0307-4358&volume=36&issue=8&articleid=1865458&show=abstract
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    Bibliographic Info

    Article provided by Emerald Group Publishing in its journal Managerial Finance.

    Volume (Year): 36 (2010)
    Issue (Month): 8 (August)
    Pages: 703-721

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    Handle: RePEc:eme:mfipps:v:36:y:2010:i:8:p:703-721

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    Web page: http://www.emeraldinsight.com

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    Postal: Emerald Group Publishing, Howard House, Wagon Lane, Bingley, BD16 1WA, UK
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    Web: http://www.emeraldinsight.com/mf.htm

    Related research

    Keywords: Equity capital; Insider trading; Share values; Shareholders;

    References

    References listed on IDEAS
    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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