Seasoned Equity Offerings and Stock Price Crashes

Abstract

Using a large sample of U.S. firms during 1987-2011, we find robust evidence that the issuance of seasoned equity is associated with abnormally high future stock price crash risk. The association between seasoned equity offerings and crash risk is stronger among offerings that involve the sale of secondary shares (existing shares sold by insiders or large blockholders). We also find that recent seasoned equity issuers are far less likely to experience sudden positive price jumps relative to firms that have not recently issued equity. Our findings of elevated crash risk and diminished jump risk, when taken together, are consistent with a heightened propensity for firms to hoard bad news but not good news when issuing equity. In analyses of open market insider trading prior to crashes, we find that net selling by CEOs and CFOs is abnormally high in years succeeded by crashes relative to years not succeeded by crashes and is especially high among seasoned equity issuers that subsequently crash, which is consistent with crashes, especially those that occur after SEOs, resulting from bad news hoarding.