Abstract
We examine a sample of 674 SEOs from 1999-2010 where reduced R&D spending is significantly associated with the lowering of insider ownership proportions. With this association established, we derive an R&D manipulation variable measuring underinvestment in R&D. We add to the SEO-R&D literature by examining the relation between R&D underinvestment and common stock valuation around SEOs. In contrast to the IPO research, we do not find that underinvestment in R&D leads to greater SEO stock valuations during the offer price setting process. Like the IPO research, we find that underinvestment in R&D leads to lower stock valuations for short-run post-offering tests. In contrast to the long-run IPO results, we find a significant association between R&D manipulation and stock valuation for long-run post-offering tests where underinvestment in R&D is associated with lower stock valuations. We also find the five % owner group for SEOs is important in explaining R&D manipulation and discover that underpricing for SEOs is not related to R&D manipulation. These latter two findings are different from IPOs. In conclusion, SEOs can be quite different from IPOs when examining the association between the insider manipulation of R&D and stock valuation
Highlights
Scholars provide bipolar hypotheses to cover the two contrasting schools of thought related to which variable, R&D or earnings, should be inflated to impact valuation
Like initial public offerings (IPOs), we find the change in insider ownership proportions is significantly associated with seasoned equity offerings (SEOs) stock valuation from the offering price process to three years after the offering
We examine a sample of 674 SEOs from 1999-2010 where reduced R&D spending is significantly associated with the lowering of insider ownership proportions
Summary
Our sample of 674 SEOs is supplied by HKW (forthcoming) where SEOs were identified from the Investment Dealers’ Digest (IDD) for the period of 1999-2010. This panel reveals the median R&D as a proportion of total assets for the second fiscal year ending before the offer date is 0.106. The FPO group consists of large institutional owners, venture capitalists, and other investors who individually each own at least five % of the company’s shares, but who are not in the DandO group For all insiders, their ownership proportions before and after the SEO average 52.9% and 42.6%, respectively, giving an average change of -10.3%. Even when insiders are buying, their overall ownership proportions are often falling due to a mean increase of 13.4% in the number of outstanding shares brought about by the average SEO. For this panel, we use CRSP’s exchangebased, equal-weighted index as the SEO market index. The industry price-to-earnings ratio and book equity-to-market equity ratio average 41.51 and 3.74, respectively
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