Option Introduction and Secondary Equity Offerings
Journal of Applied Finance, 2010
30 Pages Posted: 29 Dec 2009 Last revised: 13 Jan 2011
Date Written: December 7, 2009
We analyze the impact of regulation and option introduction on the price effects of secondary equity offerings before and after options are introduced on the underlying stocks. After controlling for the implementation of SEC Rules 10b-21 in 1988 and 105 in 1997, we find that option availability is associated with smaller SEO discounts. We conclude that this reflects improved efficiency of market prices and that the use of options to alleviate constraints on short sales imposed by Rules 10b-21 and 105 can be viewed as a beneficial form of regulatory arbitrage that counterbalances market inefficiency caused by regulatory rules themselves.
Keywords: SEO, short sales, short sales constraints, option introduction, financial regulation
JEL Classification: G14, G32, L51
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