Executive compensation structure and the motivations for seasoned equity offerings

We hypothesize that managers who receive high equity-based compensation have greater incentive to avoid ownership dilution by timing their seasoned equity offers to periods when investors temporarily overvalue their stock. We provide empirical support for this hypothesis using a measure of equity-based compensation that reflects the sensitivity of the top five executives' wealth (based on ownership of stock, options, and restricted shares) to a 1% change in stock price. We find that firms associated with high equity-based compensation for top executives experience abnormally low stock returns and relatively unfavorable changes in operating performance in the three-year period following the issue. Overall, the findings support the premise that managers whose wealth is most sensitive to stock price changes are more likely to act in the interest of current shareholders by issuing equity when they believe their stock is overvalued

Does Rule 10b-21 increase SEO discounting?

Short sale constraints prior to seasoned equity offers, imposed by Rule 10b-21 in 1988, are believed to compromise pricing efficiency and contribute to the large temporal increase in offer price discounting. This study provides additional insights by examining shelf-registered offers, which were exempt from pre-issue short sale constraints until 2004. The results suggest that pre-issue short sale constraints do not influence the level of discounting in seasoned equity offers. Moreover, this study reports that the recent temporal increase in discounting is due to a greater prevalence of overnight shelf offers, which are associated with relatively large offer price discounts.Seasoned equity offer Discounting Short sale constraints Shelf registration

Equity issues and temporal variation in information asymmetry

We investigate the intertemporal relation between information asymmetry and equity issues, and particularly focus on which firms drive this relation. We find that when information asymmetry for a particular firm is low compared to the recent past, the firm is more likely to issue equity as opposed to debt. Importantly, this intertemporal association is driven by firms with high levels of information asymmetry. These firms are more prone to adverse selection costs and thus have more to gain by issuing equity after a narrowing of the information gap between managers and investors. Our findings are robust to various firm-specific proxies for information asymmetry.Seasoned equity offer Information asymmetry Pecking order theory

Short Sale Constraints, Dispersion of Opinion, and Market Quality: Evidence from the Short Sale Ban on U.S. Financial Stocks

The three-week ban on short selling during 2008 for nearly 800 U.S. financial stocks provides an opportunity to directly test how binding short sale constraints affect stock valuation. We focus on the relative valuation effects of the ban on stocks with higher vs. lower dispersion of investor opinion and stocks that experience greater vs. smaller deterioration in market quality. First, we find that the initiation of the ban is associated with abnormal price increases that continue even after the ban. Second, valuation increases are significantly more pronounced for stocks associated with greater dispersion of opinion. However, after the ban is removed, this dispersion effect disappears. Third, the ban is associated with large increases in relative quoted spreads and decreases in the average number of trades per day, consistent with a reduction in market quality. Finally, the banned stocks that face the greatest widening in their spread experience weaker abnormal stock performance during and after the ban. In summary, the dispersion-related findings support Miller’s (1977) argument that high dispersion stocks become overvalued under binding short sale constraints. The spread-related findings suggest that short sellers are viewed as informed investors. In the absence of short sellers, investors demand higher risk premiums to reflect the increased uncertainty about the stock’s value. From a policy standpoint, the actions of the Securities and Exchange Commission might have curbed excessive price declines for troubled firms without lasting differential valuation consequences for higher vs. lower dispersion stocks. However, these policy actions had severe market quality consequences. (JEL G12, G14, G18, G28) Short Sale Constraints, Dispersion of Opinion, and Market Quality