Insider signaling and seasoned equity offerings

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.

Citation

Hull, R.M., Kwak, S. and Walker, R.L. (2010), "Insider signaling and seasoned equity offerings", Managerial Finance, Vol. 36 No. 8, pp. 703-721. https://doi.org/10.1108/03074351011056536