Option Introduction and Secondary Equity Offerings

Journal of Applied Finance, 2010, Vol. 20, Issue 1, pp. 47-63

Posted: 29 Jul 2012

See all articles by Kishore Tandon

Kishore Tandon

CUNY Baruch College - Zicklin School of Business

Susana Yu

Iona College

Gwendolyn P. Webb

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

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Date Written: March 1, 2010

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: Options (Finance), Stocks Prices, Market Prices, Short Selling, Derivative Securities, Arbitrage

Suggested Citation

Tandon, Kishore and Yu, Susana and Webb, Gwendolyn P., Option Introduction and Secondary Equity Offerings (March 1, 2010). Journal of Applied Finance, 2010, Vol. 20, Issue 1, pp. 47-63. Available at SSRN: https://ssrn.com/abstract=1636132

Kishore Tandon (Contact Author)

CUNY Baruch College - Zicklin School of Business ( email )

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New York, NY 10010
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(646) 312-3468 (Phone)
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Susana Yu

Iona College ( email )

715 North Avenue
New Rochelle, NY 10801
United States

Gwendolyn P. Webb

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

Department of Economics & Finance
P.O. Box B13-289 1 Bernard Baruch Way
New York, NY 10010
United States
646-312-3485 (Phone)

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