Insider behavior and R&D changes around seasoned equity offerings

Abstract

Unlike the IPO research, the SEO research has not examined the relation between insider behavior and R&D changes around offering dates. We tread new ground by examining this relation for SEOs. Like the IPO research, we find a positive association between changes in R&D and changes in insider ownership proportions. However, the comparison of SEOs with IPOs fails to generate complete agreement. For example, our insider results for SEOs are driven as much by five percent owners as by directors and officers, while IPO results are driven by directors and officers. Furthermore, while the IPO research and our SEO study both find evidence for the earnings manipulation hypothesis, our SEO results also offer support for the R&D signaling hypothesis. This latter support is due strictly to the five percent ownership group. Additionally, our insider results for SEOs indicate that endogeneity is just as pronounced during non-bubble periods as bubble periods. For IPOs, the evidence indicated endogeneity was a bubble period phenomenon. The main factor in explaining differences between SEOs and IPOs involves the five percent group consisting of large institutional owners who can amass large holdings and, along with directors and officers, control decision-making around SEOs. This decision-making cannot only reduce R&D to inflate earnings when insiders are lowering their ownership but can also increase R&D when insiders are prone to increase their ownership based on positive sentiments. For this positive situation, firms are more likely to be increasing capital expenditures with the five percent owners pushing this agenda.