Short Sales Constraint, Information Content, and SEO Pricing

37 Pages Posted: 27 Sep 2011

See all articles by Charlie Charoenwong

Charlie Charoenwong

Nanyang Technological University (NTU)

David K. Ding

Singapore Management University - Lee Kong Chian School of Business

Ping Wang

Nanyang Technological University (NTU) - Nanyang Business School

Date Written: August 2011

Abstract

This article empirically examines the influence of the SEC’s Rule 105, Regulation M, on informed trading and the information content of stock prices surrounding the offer day of a seasoned equity offering (SEO). The results of this study show that the constraints on short sales imposed by the Rule inhibit informed trading and hamper the incorporation of information into the stock price for offers with private adverse information and without listings on the options market. These constraints contribute to a substantial increase in price uncertainty and a relatively more sensitive response by the market to seller-initiated trading. After controlling for other potential causes of SEO discounts, such as price pressure and rent expropriation, our results show that the decrease in information content of stock prices just before an offer day have a significant impact on the value discount of an SEO. Rule 105’s restrictions on informed trading appear to cause overpricing of those stocks for which traders have access to private adverse information, thus increasing the pressure to sell on the offer day.

Suggested Citation

Charoenwong, Charlie and Ding, David K. and Wang, Ping, Short Sales Constraint, Information Content, and SEO Pricing (August 2011). Massey U. College of Business Research Paper No. 30, Available at SSRN: https://ssrn.com/abstract=1934280 or http://dx.doi.org/10.2139/ssrn.1934280

Charlie Charoenwong (Contact Author)

Nanyang Technological University (NTU) ( email )

Nanyang Business School, BF Division
S3-01c-104
Singapore, 639798
Singapore
+65 6790 4799 (Phone)
+65 6791 3697 (Fax)

David K. Ding

Singapore Management University - Lee Kong Chian School of Business ( email )

50 Stamford Road
Singapore, 178899
Singapore
+65 6828-0245 (Phone)

Ping Wang

Nanyang Technological University (NTU) - Nanyang Business School ( email )

Division of Banking & Finance
S3-01c-79
Singapore 639798
Singapore

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