Asymmetric Revisions to Primary and Secondary Shares in Seasoned Equity Offerings

Abstract

This paper examines the relation between revealed market demand and insider amendments to the number of primary and secondary shares offered during the seasoned equity offering (SEO) process. We define strong (weak) market demand for an SEO as a positive (negative) buy-and-hold abnormal return over the registration window. We find that insiders make amendments to primary and secondary shares conditional on the market demand revealed in the SEO registration period, but that the frequency, direction, and size of the amendments are not consistent across the two types of shares. For instance, insiders amend the prospectus to significantly decrease (increase) the number of secondary shares when the revealed market demand during the registration period is weak (strong). Amendments to originally filed primary shares are less prevalent. In addition, downward revisions in primary shares are unrelated to the market demand, and are less likely to occur the higher the pre-announcement stock price run-ups. Upward revisions in primary shares, however, are sensitive to strong market demand revealed in the registration period. Finally, when insiders amend the prospectus to increase (decrease) secondary shares, they either keep the number of primary shares constant, or increase (decrease) secondary shares disproportional to primary shares. These results are consistent with insiders employing a demand-conditioned adjustment strategy to secondary shares, as well as acting opportunistically to maximize personal wealth.