Does Divergence of Opinion Affect Stock Returns? Evidence from Japanese SEOs

36 Pages Posted: 20 Mar 2012 Last revised: 9 Nov 2012

See all articles by Hideaki Kiyoshi Kato

Hideaki Kiyoshi Kato

Nagoya University - Graduate School of Economics

Katsushi Suzuki

Hitotsubashi University - Graduate School of International Corporate Strategy

Date Written: November 10, 2012

Abstract

The divergence of opinion model originally proposed by Miller (1977) has recently received a great deal of attention. Focusing on the unique offering process of Japanese seasoned equity offerings (SEOs), we are able to directly test the Miller model. A comparable analysis cannot be performed on U.S. SEOs. We find our proxy for divergence of opinion is negatively related to stock returns on both the announcement day and the issue day. This implies that the demand curve for the issuing firm’s common stock steepens as the dispersion of opinion for a stock widens. We find that issue size is also related to stock returns on both dates. The relation is stronger for stocks with higher dispersions of opinion. This finding is consistent with Miller’s prediction. We also show that short sales constraints cause market underreaction. Further, we show that manipulative short selling is concentrated around the price determination day. However, our results regarding opinion divergence are free from the manipulative short selling effect.

Keywords: divergence of opinion, seasoned equity offerings, short sales, underreaction

JEL Classification: G14, G15, G32

Suggested Citation

Kato, Hideaki K. and Suzuki, Katsushi, Does Divergence of Opinion Affect Stock Returns? Evidence from Japanese SEOs (November 10, 2012). Available at SSRN: https://ssrn.com/abstract=2023490 or http://dx.doi.org/10.2139/ssrn.2023490

Hideaki K. Kato

Nagoya University - Graduate School of Economics ( email )

1 Furo-cho
Chikusa-ku
Nagoya 464-8601, 464-8601
Japan
+81-52-789-4928 (Phone)
+81-52-789-4928 (Fax)

Katsushi Suzuki (Contact Author)

Hitotsubashi University - Graduate School of International Corporate Strategy ( email )

2-1-2 Hitotsubashi
Chiyoda-ku,
Tokyo, 101-8439
Japan

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