Differences in the Information Environment Prior to Seasoned Equity Offerings under Relaxed Disclosure Regulation

Abstract

The Securities Offering Reform (SOR), promulgated by the U.S. Securities and Exchange Commission (SEC) in 2005, represents a major change in the seasoned equity offering (SEO) process. SOR eases disclosure restrictions and reduces uncertainty regarding disclosures allowed prior to an SEO. The SEC argued that SOR would result in an improved information environment and benefit capital formation efficiency. In contrast, critics claimed that SOR would allow firms to hype their stock before an SEO to the detriment of the information environment. It is also possible that SOR is not effective in generating greater disclosure and affecting the information environment during equity capital formation because of ongoing concerns such as the litigious climate in the U.S. This paper is the first to examine differences in disclosure and the information environment at the time of seasoned equity capital formation under SOR. Overall, the results suggest that relaxed disclosure restrictions under SOR are associated with greater disclosure immediately preceding the SEO issue date, and greater disclosure is related to a richer information environment with capital formation benefits. During the month before the SEO issue date under SOR, we find more frequent disclosure of management earnings forecasts and Form 8-K filings, and management earnings forecasts are more accurate. In addition, we find disclosure within a week before the SEO issue date under SOR is associated with greater absolute market-adjusted returns (i.e., information magnitude) and more positive stock returns with no reversal afterward (i.e., capital formation benefits through informative disclosure).

Keywords: Securities Offering Reform, Securities regulation, Seasoned equity offerings, Disclosure, Information environment, Shelf registration

JEL Classification: M41, G38, K22