Option Introduction and Secondary Equity Offerings
17 Pages Posted: 4 Dec 2015
Date Written: 2010
We analyze the impact of regulation and option introduction on the price effects of secondary equity offerings before and after options are introduced on the underlying stocks. After controlling for the implementation of SEC Rules 10b-21 in 1988 and 105 in 1997, we find that option availability is associated with smaller SEO discounts. We conclude that this reflects improved efficiency of market prices and that the use of options to alleviate constraints on short sales imposed by Rules 10b-21 and 105 can be viewed as a beneficial form of regulatory arbitrage that counterbalances market inefficiency caused by regulatory rules themselves.
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