Abstract
We investigate three issues about the impact of insider trades and institutional holdings on seasoned equity offerings (SEOs). First, we test how insider trades affect the trading behavior of institutional investors in SEOs. Second, we test whose trading behavior, either insiders or institutional investors, has greater explanatory power for the performance of SEO firms after issuing new stocks. Third, we analyze the industry-wide spillover effects of insider trades and institutional holdings. Empirically, we find that insiders and institutional investors of SEO firms may utilize similar information in their transactions because insider trades induce similar trading behavior for institutional investors. In addition, insider trades, relative to institutional holdings, have greater explanatory power for SEO firm’s long-term performance. Finally, compared with insider trades, institutional holdings have a more significant spillover effect in the industry of SEO firms.
Highlights
Information asymmetry exists in financial markets around the world
In the seasoned equity offerings (SEOs), the insiders or institutional investors may signal some private information through their trading behaviors
This result implies that insiders and institutional investors may have a similar point of view regarding the SEOs
Summary
Information asymmetry exists in financial markets around the world. Some investors have information advantage relative to others and normally they would take advantage of these information sources to benefit themselves (Akerlof 1970; Chiang and Venkatesh 1988; Marquardt and Wiedman 1998; Noe 1999; Aboody and Lev 2000; Dell’Ariccia and Marquez 2004; Eleswarapu et al 2004). Insiders and institutional investors are two types of investors that may have information advantages over other outside or retail investors (Frankel and Li 2004; Huson and MacKinnon 2003; Baik et al 2010; Jiang 2010). These two parties may share the same information sources and researchers utilize their trading behavior to forecast the firm’s performance after seasoned equity offerings (SEOs) (Piotroski and Roulstone 2004; Wahal and McConnell 2000; Ferreira and Matos 2008; Aggarwal et al 2011). We extend our research to the spillover effect of these two types of investors in the industries. (Bradley and Yuan 2013; Hameed et al 2015; Benveniste et al 2002; Benveniste et al 2003; Slovin et al 1992; Hsu et al 2010)
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