Title

Short Sales Contraints, Information Content of Stock Prices, and Seo Pricing

Publication Type

Conference Paper

Publication Date

10-2006

Abstract

This article examines the influence of SEC’s Rule 105, Regulation M, on informed trading and the information content of stock price surrounding the offer day of a seasoned equity offering (SEO). The results of this study show that the constraints on short sales imposed by the Rule inhibit informed trading and hamper the incorporation of information into the stock price for offers with private adverse information and without listings on the options market. These constraints contribute to a substantial increase in price uncertainty and market’s relatively more sensitive response to seller-initiated trading. After controlling for other potential causes of SEO discounts, such as price pressure and rent expropriation, our results show that the decrease in information content of stock price just before an offer day has a significant impact on the value discount of an SEO. The Rule’s restrictions on informed trading appear to cause overpricing of those stocks for which traders have access to private adverse information, which increases the pressure to sell on the offer day.

Keywords

short sales constraint, information content of stock price, seasoned equity offering (SEO), SEC Rule 105.

Discipline

Finance and Financial Management | Portfolio and Security Analysis

Research Areas

Finance

Publication

Financial Management Association International Conference, Salt Lake City, Utah, October 2006

City or Country

Salt Lake City, UT

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