We examine the influence of SEC's Rule 105 on informed trading and the information content of stock prices around an SEO's offer day. We show that constraints on short sales inhibit informed trading and hamper incorporation of information into stock prices for offers whose traders have private adverse information and without options listing. The constraints contribute to increased price uncertainty and higher market sensitivity to seller-initiated trading. After controlling for other causes of SEO discounts, we find that the decrease in information content of stock prices just before an offer day has a significant impact on the SEO's value discount.
Short sales constraint, Information content of stock prices, Seasoned equity offering (SEO), SEC Rule 105
Finance and Financial Management
International Review of Financial Analysis
CHAROENWONG, Charlie; DING, David K.; and WANG, Ping.
Short sales constraint and SEO pricing. (2013). International Review of Financial Analysis. 29, 107-118. Research Collection Lee Kong Chian School Of Business.
Available at: http://ink.library.smu.edu.sg/lkcsb_research/3600
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