Do Seasoned Offerings Really Signal Anything Significant from Insiders?

Abstract

We examine the impact of insider behavior that accompanies seasoned offerings (SEOs) and discover three unexpected findings. First, firms with greater insider ownership percentages underperform before SEOs compared to firms with lesser percentages. Second, insiders can use SEOs to maximize their own short-run welfare because the response to an SEO announcement does not depend on the "change" in insider ownership percentages but only on the "absolute" percentage that remains after the offering. Third, firms that undergo greater decreases in insider ownership perform much better after SEOs. This finding is economically and statistically significant suggesting that investors should be skeptical of insider ability to predict future performance. In fact, the evidence suggests investors should do just the opposite of insiders!