Option Introduction and Secondary Equity Offerings

Tandon, Kishore; Yu, Susana; Webb, Gwendolyn P.

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Option Introduction and Secondary Equity Offerings

Journal of Applied Finance, 2010

30 Pages Posted: 29 Dec 2009 Last revised: 13 Jan 2011

See all articles by Kishore Tandon

Kishore Tandon

CUNY Baruch College - Zicklin School of Business

Gwendolyn P. Webb

City University of New York (CUNY) - Baruch College - Zicklin School of Business

There are 3 versions of this paper

Date Written: December 7, 2009

Abstract

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

Suggested Citation: Suggested Citation

Tandon, Kishore and Yu, Susana and Webb, Gwendolyn P., Option Introduction and Secondary Equity Offerings (December 7, 2009). Journal of Applied Finance, 2010, Available at SSRN: https://ssrn.com/abstract=1529124