Stock derivatives and seasoned equity offerings

2022 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Robert Martin Hull ◽  
Sungkyu Kwak ◽  
Rosemary Walker
Keyword(s):  
Stock Returns ◽  
Stock Price ◽  
Stock Options ◽  
Seasoned Equity Offerings ◽  
Stock Option ◽  
Fiscal Year ◽  
Equity Offerings ◽  
Past Performance ◽  
Content Type ◽  
Run Up

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.

scholarly journals CEO-shareholder incentive alignment around SEOs

2015 ◽  
Vol 41 (1) ◽  
pp. 45-66
Author(s):  
Yilei Zhang ◽  
Yi Jiang
Keyword(s):  
Stock Price ◽  
Wealth Effect ◽  
Seasoned Equity Offerings ◽  
Equity Offerings ◽  
Equity Financing ◽  
Compensation Policy ◽  
Incentive Alignment ◽  
Content Type ◽  
Financing Decisions ◽  
Long Run

Purpose – The purpose of this paper is to examine CEO wealth changes around seasoned equity offerings (SEOs) to explore the shareholder-manager incentive alignment in major corporate equity financing decisions. Design/methodology/approach – The authors decompose CEO wealth into three major components: price effect, board compensation grant, and CEO’s own portfolio adjustment. The authors then compare SEO-event sample vs non-event samples; and evaluate the dynamic and long-run CEO wealth effect. Findings – The authors find when market reacts negatively to SEO announcement leading to losses in CEO’s existing firm-related wealth, CEO gets additional grants to offset the losses. Although this appears to be a rent-seeking activity, the authors find that the additional grants are mainly in the form of stock options which would have no value if stock price failed to pick up in the future. In this sense, the additional grants align the interests between shareholders and managers. Consistent with this argument, the authors show that the additional grants motivate CEOs to promote the stock performance, benefiting themselves as well as shareholders in the long-run. Originality/value – The study explicitly calculates the contribution of each wealth component to CEO total wealth effect. The results improve the understanding of CEO compensation policy change after major corporate event and contribute to the literature of the optimality explanation of prevailing compensation policy.

Option repricing and executive retention – revisited

2016 ◽  
Vol 15 (4) ◽  
pp. 499-517
Author(s):  
Sandra Renfro Callaghan ◽  
Chandra Subramaniam ◽  
Stuart Youngblood
Keyword(s):  
Stock Price ◽  
Stock Options ◽  
Control Sample ◽  
Stock Option ◽  
Executive Turnover ◽  
Content Type ◽  
Executive Stock Option ◽  
Managerial Talent ◽  
Option Repricing ◽  
Stock Option Repricing

Purpose This paper aims to directly test the assertion by proponents of executive stock option repricing that repricing leads to increased management retention. Previous studies find either no effect or decreased retention following stock price repricing. This paper uses a more precise research design to re-examine the relationship between stock option retention and management retention. Design/methodology/approach The authors use an empirical methodology and construct a sample of 158 firms and 201 repricing events, and a control sample of 201 non-repricing firms. They then examine executive turnover in the four years following the stock option repricing event. Findings It was found that, consistent with agency theory, stock option repricing actually results in greater executive retention. Specifically, CEO retention is significantly greater for repricing firms relative to non-repricing firms for up to three years following the repricing date, and non-CEO executive retention is significantly greater for two years. Research limitations/implications Firms continue to restructure management through stock option repricing. However, recent option repricing has been undertaken during a period when the economy is in decline, making it is difficult to disentangle effects of option repricing on management retention. Hence, this paper uses repricing data from an earlier period, from 1992-1997, when the economy was good. Originality/value Many firms argue that when stock options are out-of-the-money and managerial talent is in demand, repricing executive stock options is necessary to retain managers. Previous studies find contradictory or no support for this view. Using a much more precise methodology, this paper shows that firms do retain managers when they reprice their options compared to when they do not.

scholarly journals Stock Price Reactions And Long Run Performance Of Rule 144A Equity Issuance

2013 ◽  
Vol 29 (6) ◽  
pp. 1615
Author(s):  
Kelly Cai
Keyword(s):  
Stock Returns ◽  
Stock Price ◽  
Abnormal Return ◽  
Seasoned Equity Offerings ◽  
Cumulative Abnormal Return ◽  
Equity Issuance ◽  
Equity Offerings ◽  
Valuation Effect ◽  
Long Run ◽  
Common Stocks

This paper examines the valuation effect of Rule 144A equity offers on issuing firms common stocks for the period 1970 to 2010. Similar to findings for seasoned equity offerings, I find a statistically significant cumulative abnormal return of -3.07 percent over the three-day issue period for the overall sample of 160 Rule 144A equity offers. Further, I find that issuing firms exhibit significant long-run under-performance in stock returns over the three years after the issuance of Rule 144A equity offers. The results are consistent with the under-reaction hypothesis.

Estimating defaults in organized security lending markets

2016 ◽  
Vol 24 (3) ◽  
pp. 343-362
Author(s):  
Latif Cem Osken ◽  
Ceylan Onay ◽  
Gözde Unal
Keyword(s):  
Credit Risk ◽  
Stock Returns ◽  
Stock Price ◽  
Price Volatility ◽  
Equity Market ◽  
Ordinary Least Squares ◽  
Least Squares Regression ◽  
Content Type ◽  
Central Counterparties ◽  
Risk Determinants

Purpose This paper aims to analyze the dynamics of the security lending process and lending markets to identify the market-wide variables reflecting the characteristics of the stock borrowed and to measure the credit risk arising from lending contracts. Design/methodology/approach Using the data provided by Istanbul Settlement and Custody Bank on the equity lending contracts of Securities Lending and Borrowing Market between 2010 and 2012 and the data provided by Borsa Istanbul on Equity Market transactions for the same timeframe, this paper analyzes whether stock price volatility, stock returns, return per unit amount of risk and relative liquidity of lending market and equity market affect the defaults of lending contracts by using both linear regression and ordinary least squares regression for robustness and proxying the concepts of relative liquidity, volatility and return constructs by more than variable to correlate findings. Findings The results illustrate a statistically significant relationship between volatility and the default state of the lending contracts but fail to establish a connection between default states and stock returns or relative liquidity of markets. Research limitations/implications With the increasing pressure for clearing security lending contracts in central counterparties, it is imperative for both central counterparties and regulators to be able to precisely measure the risk exposure due to security lending transactions. The results gained from a limited set of lending transactions merit further studies to identify non-borrower and non-systemic credit risk determinants. Originality/value This is the first study to analyze the non-borrower and non-systemic credit risk determinants in security lending markets.

Does the second wave of COVID-19 undermine corporate immunity? International evidence

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Huy Viet Hoang ◽  
Cuong Nguyen ◽  
Khanh Hoang
Keyword(s):  
Stock Returns ◽  
Stock Price ◽  
Fixed Effects ◽  
Management Strategies ◽  
The United States ◽  
Least Square ◽  
Content Type ◽  
The Impact ◽  
Second Wave ◽  
Practical Implications

PurposeThis study compares the impact of the COVID-19 pandemic on stock returns in the first two waves of infection across selected markets, given built-in corporate immunity before the global outbreak.Design/methodology/approachThe data are collected from listed firms in five markets that have experienced the second wave of COVID-19 contagion, namely the United States (US), Australia, China, Hong Kong and South Korea. The period of investigation in this study ranges from January 24 to August 28, 2020 to cover the first two COVID-19 waves in selected markets. The study estimates the research model by employing the ordinary least square method with fixed effects to control for the heterogeneity that may confound the empirical outcomes.FindingsThe analysis reveals that firms with larger size and more cash reserves before the COVID-19 outbreak have better stock performance under the first wave; however, these advantages impede stock resilience during the second wave. Corporate governance practices significantly influence stock returns only in the first wave as their effects fade when the second wave emerges. The results also suggest that in economies with greater power distance, although stock price depreciation was milder in the first wave, it is more intense when new cases again surge after the first wave was contained.Practical implicationsThis paper provides practical implications for corporate managers, policymakers and governments concerning crisis management strategies for COVID-19 and future pandemics.Originality/valueThis study is the first to evaluate built-in corporate immunity before the COVID-19 shock under successive contagious waves. Besides, this study accentuates the importance of cultural understanding in weathering the ongoing pandemic across different markets.

CEO vs. COO: shareholder perceptions of M&A announcements based on insider trades

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Vinh Huy Nguyen ◽  
Carolina Gomez ◽  
Suchi Mishra ◽  
Ali M. Parhizgari
Keyword(s):  
Stock Price ◽  
Fixed Effects ◽  
Economic Recession ◽  
Chief Executive ◽  
Positive Influence ◽  
Past Performance ◽  
Industry Growth ◽  
Content Type ◽  
Chief Operating Officer ◽  
Regression Tests

PurposeWe examine how the net share purchases of top executives of acquiring firms, specifically the Chief Executive Officer (CEO) and the Chief Operating Officer (COO), can impact shareholder perceptions of a merger and acquisition (M&A) around the announcement time.Design/methodology/approachRegression tests using the post-announcement cumulative returns as the dependent variables, and CEO and COO net purchases as independent test controlling for the net purchases of all other insiders, COO and CEO ownership, exercised options, unexercised exercisable options, merger type, pre-announcement firm size, past performance, industry growth, industry instability, year and industry fixed effects. The regression tests are used for various sub-samples (i.e. non-contemporaneous events, duality, operational complexity, economic conditions).FindingsWe find that overall shareholders value the COO's net purchases before the announcement but not those of the CEOs. If the COO is also the CEO, then executive buy-ins appear to have a negative reaction from the shareholders. When the firm has many business segments or when the announcement is made in an economic recession, the COO's net purchases do not have a positive influence on the shareholders.Originality/valueWe are the first to provide evidence that investors pay attention to the COO around M&A announcements. In the age of celebrity CEOs, who can instantaneously change the stock price with one press release, having another executive that can shape the opinion of investors can diversify the agency risk.

Seasoned Equity Offerings and Stock Price Crashes

2015 ◽  
Author(s):  
Rodney D Boehme ◽  
Veljko Fotak ◽  
Anthony D. May
Keyword(s):  
Stock Price ◽  
Seasoned Equity Offerings ◽  
Equity Offerings

scholarly journals The Effects of Operational Structure Change on Performance after Seasoned Equity Offerings

2017 ◽  
Author(s):  
Chihyoun Ahn ◽  
Mi-Ok Kim ◽  
Hyung-Rok Jung
Keyword(s):  
Sustainable Development ◽  
Stock Price ◽  
Operating Performance ◽  
Seasoned Equity Offerings ◽  
Structure Change ◽  
Equity Offerings ◽  
Price Response ◽  
Sustainability Strategy ◽  
Rate Of Increase ◽  
Operational Structure

Sustainability is directly linked to firms’ survival in competitive markets. To survive, firms need extra capital, and seasoned equity offerings (SEOs) are one sustainability strategy. Additional resources from SEOs leads to changes in firms’ operational structure, which brings future sustainability. This study investigates whether there is sustainability in firms’ operational structure and the effects of sustainable development on operational performance and market reaction. We measure the operational structure change of firms as three proxies: 1) the rate of increase in the number of operating segments, 2) the Berry–Herfindahl index using the ratio of sales of each operating segment out of total sales, and 3) the size of net investment in plant and equipment. Our results show that operational structure change has a statistically significant and positive correlation with long-term operating performance. In addition, there is no significant stock price response at first, but the operating performance in the next term is perceived as a favorable factor after 3 years. The results show that there are different responses in the stock market toward operational structure change. The empirical results confirm that firms with SEO have sustainable development in operational structure and that markets recognize firms’ sustainability strategy arising from SEOs.

Large institutional investors and the pressure to manage earnings surrounding seasoned equity offerings

2019 ◽  
Vol 61 (2) ◽  
pp. 402-420
Author(s):  
Mouna Njah ◽  
Raoudha Trabelsi
Keyword(s):  
Earnings Management ◽  
Institutional Investors ◽  
Information Quality ◽  
Management Practices ◽  
Seasoned Equity Offerings ◽  
Equity Offerings ◽  
Content Type ◽  
Multivariate Tests ◽  
Regulated Firms ◽  
Investor Activism

Purpose The purpose of this paper is to investigate the monitoring role exerted by large institutional investors and their ability to restrict the earnings management practices conducted around seasoned equity offerings (SEOs). Design/methodology/approach The sample includes 130 French SEOs by non-regulated firms during 2004-2015. The authors used various cross-section, univariate and multivariate tests using several proxies for earnings management. They attempt to highlight that firms issuing SEOs are more able to manage earnings around SEOs owing to the predominance of large speculative institutional investors. Noteworthy, the monitoring role exerted by sophisticated institutional investors turns out to restrict the earnings management opportunities surrounding a SEOs event. Findings The results show that the issuing firms tend to manipulate earnings in an upward trend with respect to the year preceding the SEO offer. Thus, a special attention has been drawn on the fact that the issuing companies strive to prove their ability to manage earnings around SEOs in presence of large speculative institutional investors. Practical implications The results provide useful insights into the role different types of institutional investors play in terms of enhancing both governance and accounting information quality. Originality/value This paper adds to the literature questioning the evidence that institutional investor activism frequently engage in misleading earnings management around corporate events. The authors provide an alternative explanation for earnings management around SEOs in the French context.

Dividend policy and probability of extreme returns

2020 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Mohammed Bouaddi ◽  
Omar Farooq ◽  
Neveen Ahmed
Keyword(s):  
Stock Returns ◽  
Stock Price ◽  
Dividend Policy ◽  
Actual State ◽  
Content Type ◽  
Market Participants ◽  
Dividend Payments ◽  
Ex Post ◽  
Ex Ante ◽  
The Future

PurposeThis study examines the effect of dividend policy on the ex ante probability of stock price crash and the ex ante probability stock price jump.Design/methodology/approachWe use the data of publicly listed non-financial firms from France and the ex ante measures of crash and jump probabilities (based on the Flexible Quadrants Copulas) to test our hypothesis during the period between 1997 and 2019.FindingsOur results show that dividend payments are negatively associated with the ex ante probability of crash and positively associated with the ex ante probability of jump. Our results are robust across various sub-samples and across different proxies of dividend policy. Our findings also hold when we use ex-post measures of crash and jump probabilities.Originality/valueUnlike prior literature, we use ex ante measures of crash and jump probabilities. The main advantage of this forward looking measure is that it allows for more flexibility by modeling the dependence between market returns and stock returns as functions of their actual state. Our measure is also consistent with the behavior of investors and market participants in a way that the market participants do not know the future outcome with certainty, but rather they are anticipating the future.

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