Insider signaling and seasoned equity offerings
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.
If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Volume (Year): 36 (2010)
Issue (Month): 8 (August)
|Contact details of provider:|| Web page: http://www.emeraldinsight.com|
|Order Information:|| Postal: Emerald Group Publishing, Howard House, Wagon Lane, Bingley, BD16 1WA, UK|
Web: http://emeraldgrouppublishing.com/products/journals/journals.htm?id=mf Email:
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.:
- Firth, Michael & Leung, T.Y. & Rui, Oliver M., 2010.
"Double signals or single signal? An investigation of insider trading around share repurchases,"
Journal of International Financial Markets, Institutions and Money,
Elsevier, vol. 20(4), pages 376-388, October.
- Michael Firth & T. Y. Leung & Oliver M. Rui, 2008. "Double Signals or Single Signal? An Investigation of Insider Trading Around Share Repurchases," Working Papers 222008, Hong Kong Institute for Monetary Research.
- Han, Ki C & Suk, David Y, 1998. "Insider Ownership and Signals: Evidence from Stock Split Announcement Effects," The Financial Review, Eastern Finance Association, vol. 33(2), pages 1-18, May.
- Seyhun, H Nejat, 1990. "Do Bidder Managers Knowingly Pay Too Much for Target Firms?," The Journal of Business, University of Chicago Press, vol. 63(4), pages 439-64, October.
- John, Kose & Lang, Larry H P, 1991. " Insider Trading around Dividend Announcements: Theory and Evidence," Journal of Finance, American Finance Association, vol. 46(4), pages 1361-89, September.
- Downes, David H & Heinkel, Robert, 1982. " Signaling and the Valuation of Unseasoned New Issues," Journal of Finance, American Finance Association, vol. 37(1), pages 1-10, March.
- Asquith, Paul & Mullins, David Jr., 1986. "Equity issues and offering dilution," Journal of Financial Economics, Elsevier, vol. 15(1-2), pages 61-89.
- S. Viswanathan & Bin Wei, 2008. "Endogenous Events and Long-Run Returns," Review of Financial Studies, Society for Financial Studies, vol. 21(2), pages 855-888, April.
- Brown, Stephen J. & Warner, Jerold B., 1980. "Measuring security price performance," Journal of Financial Economics, Elsevier, vol. 8(3), pages 205-258, September.
- Myers, Stewart C. & Majluf, Nicolás S., 1945-, 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Working papers 1523-84., Massachusetts Institute of Technology (MIT), Sloan School of Management.
- Bhushan, Ravi, 1989. "Firm characteristics and analyst following," Journal of Accounting and Economics, Elsevier, vol. 11(2-3), pages 255-274, July.
- John D. Lyon & Brad M. Barber & Chih-Ling Tsai, 1999. "Improved Methods for Tests of Long-Run Abnormal Stock Returns," Journal of Finance, American Finance Association, vol. 54(1), pages 165-201, 02.
- Masulis, Ronald W, 1983. " The Impact of Capital Structure Change on Firm Value: Some Estimates," Journal of Finance, American Finance Association, vol. 38(1), pages 107-26, March.
- Mark Grinblatt & Chuan Yang Hwang, .
"Signalling and the Pricing of Unseasoned New Issues,"
Rodney L. White Center for Financial Research Working Papers
1-89, Wharton School Rodney L. White Center for Financial Research.
- Mark Grinblatt & Chuan Yang Hwang, . "Signalling and the Pricing of Unseasoned New Issues," Rodney L. White Center for Financial Research Working Papers 01-89, Wharton School Rodney L. White Center for Financial Research.
- Stewart C. Myers & Nicholas S. Majluf, 1984. "Corporate Financing and Investment Decisions When Firms Have InformationThat Investors Do Not Have," NBER Working Papers 1396, National Bureau of Economic Research, Inc.
- Kothari, S. P. & Warner, Jerold B., 1997. "Measuring long-horizon security price performance," Journal of Financial Economics, Elsevier, vol. 43(3), pages 301-339, March.
- Loughran, Tim & Ritter, Jay R, 1995. " The New Issues Puzzle," Journal of Finance, American Finance Association, vol. 50(1), pages 23-51, March.
- Myers, Stewart C. & Majluf, Nicholas S., 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Journal of Financial Economics, Elsevier, vol. 13(2), pages 187-221, June.
- Gerard, Bruno & Nanda, Vikram, 1993. " Trading and Manipulation around Seasoned Equity Offerings," Journal of Finance, American Finance Association, vol. 48(1), pages 213-45, March.
- Ching, Ken M.L. & Firth, Michael & Rui, Oliver M., 2006. "The information content of insider trading around seasoned equity offerings," Pacific-Basin Finance Journal, Elsevier, vol. 14(1), pages 91-117, January.
- Vermaelen, Theo, 1981. "Common stock repurchases and market signalling : An empirical study," Journal of Financial Economics, Elsevier, vol. 9(2), pages 139-183, June.
- Shane A. Corwin, 2003. "The Determinants of Underpricing for Seasoned Equity Offers," Journal of Finance, American Finance Association, vol. 58(5), pages 2249-2279, October.
- Jensen, Michael C, 1986. "Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers," American Economic Review, American Economic Association, vol. 76(2), pages 323-29, May.
- Smith, Clifford Jr., 1977. "Alternative methods for raising capital : Rights versus underwritten offerings," Journal of Financial Economics, Elsevier, vol. 5(3), pages 273-307, December.
- Kahle, Kathleen M., 2000. "Insider trading and the long-run performance of new security issues," Journal of Corporate Finance, Elsevier, vol. 6(1), pages 25-53, March.
- Li, Xianghong & Zhao, Xinlei, 2006. "Propensity score matching and abnormal performance after seasoned equity offerings," Journal of Empirical Finance, Elsevier, vol. 13(3), pages 351-370, June.
- Fried, Jesse M., 2005. "Informed Trading and False Signaling with Open Market Repurchases," Berkeley Olin Program in Law & Economics, Working Paper Series qt8x6082cn, Berkeley Olin Program in Law & Economics.
- Finnerty, Joseph E, 1976. "Insiders and Market Efficiency," Journal of Finance, American Finance Association, vol. 31(4), pages 1141-48, September.
- Loughran, Tim & Ritter, Jay R, 1997. " The Operating Performance of Firms Conducting Seasoned Equity Offerings," Journal of Finance, American Finance Association, vol. 52(5), pages 1823-50, December.
- Lee, Inmoo, 1997. " Do Firms Knowingly Sell Overvalued Equity?," Journal of Finance, American Finance Association, vol. 52(4), pages 1439-66, September.
- Robert M. Hull & Robert Kershner, 1996. "Issue Costs and Common Stock Offerings," Financial Management, Financial Management Association, vol. 25(4), Winter.
When requesting a correction, please mention this item's handle: RePEc:eme:mfipps:v:36:y:2010:i:8:p:703-721. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Louise Lister)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.