Stock Derivatives and Seasoned Equity Offerings

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Hull, Robert M.
Kwak, Sungkyu
Walker, Rosemary
Washburn University. School of Business
Kaw Valley Bank
Issue Date
October 2021
Alternative Title
Purpose - To explore if stock derivative types (stock options and stock warrants) are associated with stock returns for firms undergoing seasoned equity offerings (SEOs). Design/methodology/approach - We regress stock returns against stock derivatives for periods around SEO announcements with standard errors clustered at the month level. Findings - We find that lower stock derivatives holdings for the fiscal year after the SEO are associated with superior pre-SEO returns. This can be explained by owners exercising their derivatives to capitalize on the pre-SEO price run-up. We find that greater stock option holdings by insiders for the fiscal year after the SEO are associated with superior post-SEO returns for up to ten years after the SEO announcement. This new finding does not hold for stock warrants. Research limitations/implications - Stock derivatives are supplied by Capital IQ. Given their description, we infer that stock options are owned largely by insiders. Thus, our insider conclusions for stock options depend on this implication. Practical implications - Stock options and stock warrants can be used strategically to reward stock derivative owners of strong performing firms for past performance. Stock options can be used to motivate insiders (primarily key executives) to achieve superior future performance. Originality/value - This study is unique in comparing the influence of holdings for stock options and stock warrants on stock price performance around SEOs. We show that the sign of the association depends on whether the test includes pre-SEO periods.