Two essays in seasoned equity offerings

Abstract

The first essay examines insider trading around seasoned equity offering announcements in Hong Kong. Consistent with prior studies, I find positive (negative) abnormal returns associated with the announcement of private placings (rights offerings). I find evidence that suggests insiders of placing firms delay trading to avoid legal and market penalties. Mature firms are more undervalued relative to growth firms after the announcement in the placing sub-sample. Furthermore, insiders sell (buy) because of a negative (positive) price response for mature (growth) firms in the rights offering sub-sample. The stock price response to the information content of insider trading depends on the type of security offered. A positive price response is observed for growth firms that announce placements. In general, growth opportunities rather than insider trading explain longer-term investment returns. The second essay examines whether pre-issue discretionary current accruals predict post-issue earnings performance and returns. I find evidence suggesting that offering firms borrow future income to manage earnings in pre-issue years and consequently earnings decrease in post-issue year 2. The information content of pre-issue discretionary current accruals is reflected in one-year buy and hold abnormal returns for the rights offering firms. The paper also examines whether the incidence of earnings management around SEOs depends on corporate governance structures. My result shows that SEO firms that have larger board size have a higher degree of earnings management around SEOs. This result is consistent with Jensen's (1993) view that smaller boards provide more of a controlling function than do larger boards.