Crash Risk and Seasoned Equity Offerings

51 Pages Posted: 6 Oct 2015 Last revised: 6 Dec 2018

See all articles by Rodney D Boehme

Rodney D Boehme

Wichita State University - Department of Finance, Real Estate & Decision Sciences (FREDS)

Veljko Fotak

State of New York (SUNY) at Buffalo; Sovereign Investment Lab, Baffi Carefin, Bocconi University

Anthony D. May

Wichita State University - W. Frank Barton School of Business

Date Written: October 10, 2018

Abstract

Using a large sample of U.S. firms during 1987–2011, we find robust evidence that the issuance of seasoned equity is associated with abnormally high future stock price crash risk. The association between seasoned equity offerings and crash risk is stronger among offerings that involve the sale of secondary shares (existing shares sold by insiders or large blockholders). We also find that recent seasoned equity issuers are far less likely to experience sudden positive price jumps relative to firms that have not recently issued equity. Our findings of elevated crash risk and diminished jump risk, when taken together, are consistent with a heightened propensity for firms to hoard bad news but not good news when issuing equity. In analyses of open market insider trading prior to crashes, we find that net selling by CEOs and CFOs is abnormally high in years succeeded by crashes relative to years not succeeded by crashes and is especially high among seasoned equity issuers that subsequently crash, which is consistent with crashes, especially those that occur after SEOs, resulting from bad news hoarding.

Keywords: seasoned equity offering, crash risk, tail risk

JEL Classification: G11, G17, G14, G24, G30

Suggested Citation

Boehme, Rodney D and Fotak, Veljko and May, Anthony D., Crash Risk and Seasoned Equity Offerings (October 10, 2018). Available at SSRN: https://ssrn.com/abstract=2669623 or http://dx.doi.org/10.2139/ssrn.2669623

Rodney D Boehme

Wichita State University - Department of Finance, Real Estate & Decision Sciences (FREDS) ( email )

Wichita, KS 67260-0078
United States

Veljko Fotak

State of New York (SUNY) at Buffalo ( email )

School of Management, University at Buffalo
236 Jacobs Management Center
Buffalo, NY 14260
United States
+1 716-645-1541 (Phone)

Sovereign Investment Lab, Baffi Carefin, Bocconi University ( email )

Via Roentgen 1
Milan
Italy

Anthony D. May (Contact Author)

Wichita State University - W. Frank Barton School of Business ( email )

1845 N. Fairmount
Wichita, KS 67260
United States

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