Institutional Trading, Information Production, and the SEO Discount: A Model of Seasoned Equity Offerings

40 Pages Posted: 16 Mar 2011

See all articles by Thomas J. Chemmanur

Thomas J. Chemmanur

Boston College - Carroll School of Management

Yawen Jiao

University of California, Riverside

Multiple version iconThere are 2 versions of this paper

Date Written: February 24, 2011

Abstract

We develop a model of the seasoned equity offering (SEO) process, starting from the SEO announcement, through pre-offer trading, and ending in the offering itself. We use our model to advance a new rationale for the existence of the SEO discount and SEO underpricing, and to analyze the role of institutional investors in SEOs. We show that the SEO discount is positively related to the extent of information asymmetry a firm faces, and SEOs with greater pre-offer net buying by institutional investors have higher institutional allocations, greater oversubscription, and lower SEO discounts. Furthermore, our model predicts a positive link between the pre-offer net buying by institutional investors and the magnitude of SEO underpricing and the long-run post-SEO operating performance.

Suggested Citation

Chemmanur, Thomas J. and Jiao, Yawen, Institutional Trading, Information Production, and the SEO Discount: A Model of Seasoned Equity Offerings (February 24, 2011). Journal of Economics & Management Strategy, Vol. 20, Issue 1, pp. 299-338, 2011. Available at SSRN: https://ssrn.com/abstract=1782527 or http://dx.doi.org/10.1111/j.1530-9134.2010.00290.x

Thomas J. Chemmanur (Contact Author)

Boston College - Carroll School of Management ( email )

Finance Department, 436 Fulton Hall
Carroll School of Management, Boston College
Chestnut Hill, MA 02467-3808
United States
617-552-3980 (Phone)
617-552-0431 (Fax)

HOME PAGE: http://https://www2.bc.edu/thomas-chemmanur/

Yawen Jiao

University of California, Riverside ( email )

Riverside, CA 92521
United States

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