Insider Ownership and Other Explanations for the Market Response to Seasoned Equity Offerings

Abstract

Recent univariate seasoned equity offering (SEO) research investigates the valuation impact from the change in inside ownership levels that occurs when insiders use SEOs to lower their ownership levels. We extend this research by investigating if the change in inside ownership levels is a significant factor within a multivariate analysis. Compared to prior research, our regression tests do a much better job of accounting for returns associated with SEO announcements and much of the performance can be attributed tot he two insider variables we test: the level of inside ownership and the change in this level. For short-run regression tests, the five major factors associated with superior stock returns are (in order of importance): (i) lower underpricing; (ii) smaller inside ownership levels; (iii) greater profitability prior to SEOs; (iv) less total risk prior to SEOs; and (v) expansion-related usage for proceeds. For long-run regression tests, the five major factors linked to superior returns are (in order of importance): (i) greater profitability prior to SEOs; (ii) smaller inside ownership levels; (iii) greater decreases in inside ownership levels; (iv) greater relative sizes of the offerings; and, (v) less total risk prior to SEOs. The significance level of independent variables for tests that surround SEOs can be mitigated (or even eliminated) because they give opposite coefficient signs for pre-SEO and post-SEO tests. Three variables that are highly significant (but give opposite coefficient signs for pre-SEO and post-SEO tests) are: time period of occurrence, risk, and leverage.