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Insider signaling and seasoned equity offerings

Author

Listed:
  • Robert M. Hull
  • Sungkyu Kwak
  • Rosemary L. Walker

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.

Suggested Citation

  • Robert M. Hull & Sungkyu Kwak & Rosemary L. Walker, 2010. "Insider signaling and seasoned equity offerings," Managerial Finance, Emerald Group Publishing, vol. 36(8), pages 703-721, July.
  • Handle: RePEc:eme:mfipps:v:36:y:2010:i:8:p:703-721
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    References listed on IDEAS

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