Stock derivatives and seasoned equity offerings

PurposeThe article aims 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/approachThe authors regress stock returns against stock derivatives for periods around SEO announcements with standard errors clustered at the month level.FindingsThe authors 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. The authors 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/implicationsStock derivatives are supplied by Capital IQ. Given their description, the authors infer that stock options are owned largely by insiders. Thus, the insider conclusions for stock options depend on this implication.Practical implicationsStock 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/valueThis study is unique in comparing the influence of holdings for stock options and stock warrants on stock price performance around SEOs. The authors show that the sign of the association depends on whether the test includes pre-SEO periods.

Seasoned Equity Offerings and Differences in Share-Price Impact by Firm Categories

The seasoned equity offering (SEO) market plays a significant role in the economic development of a country by providing liquidity for ongoing commercialization and innovation. This study is a comprehensive analysis of 149 SEOs and their effect on share prices in Thailand between 2009 and 2019. SEOs are categorized based on their time categories (early, mid, and grown) and volume categories (small, medium, big, and super). Using the event study methodology (multi-factor model), we find that most SEOs under both categories have a negative cumulative abnormal return (CAR) in the window period. Ranking the types of SEOs reveals that grown SEOs have the highest proportion of negative CAR under the time categories. Under the volume categories, medium SEOs show the largest share. The results were validated by regression assumption tests provided by Gnu Regression, Econometrics and Time-series Library, and correspond to established theories. The paper also contains an extensive literature review of studies examining the link between SEOs and share-price development. Our findings have important implications for corporations, investors, and regulatory bodies and can thus help in increasing market confidence for sustainable corporate funding.

Asymmetric Monitoring of Quarterly Financial Statements by Big 4 Auditors and the SEC's Timely Review Requirement

We investigate if Big 4 firms are asymmetrically more effective than non-Big 4 firms in monitoring income-increasing vs. income-decreasing quarterly earnings management. We also study the Securities and Exchange Commission's (SEC) 2000 requirement that audit firm reviews of quarterly financial statements be completed prior to their filing with the SEC ("timely reviews"). We find Big 4 firms are more effective than non-Big 4 firms in curbing income-increasing earnings management around seasoned equity offerings (SEOs), but not income-decreasing earnings management around open market repurchases (OMRs). In the post-2000 period, after the SEC's mandate for timely reviews began, we find income-increasing earnings management around SEOs declined significantly, and this decline is primarily driven by the clients of Big 4 firms. We provide evidence that timely quarterly reviews improve earnings quality, especially when companies have incentives to engage in income-increasing accruals and are reviewed by Big 4 firms.