NBER 2007 Market Microstructure Meetings Paper
57 Pages Posted: 25 Mar 2005 Last revised: 14 Apr 2010
Date Written: December 1, 2008
Do institutional investors possess private information about SEOs? If they do, do they use this private information to trade in a direction opposite to this information (consistent with a "manipulative trading" role) or in the same direction as this information (consistent with a direct "information production" role)? In this paper, we make use of a large sample of transaction-level institutional trading data to study institutional trading before, during, and after an SEO, and thus distinguish between the above two roles of institutional investors in SEOs. Our data allow us to explicitly identify institutional SEO share allocations for the first time in the literature. We analyze the consequences of the private information possessed by institutional investors for: SEO share allocation; institutional trading before and after the SEO and realized trading profitability; and the SEO discount. Our results can be summarized as follows. First, institutions are able to identify and obtain more allocations in SEOs with better long-term returns. Second, more pre-offer net buying of the SEO firm's equity by institutional investors is associated with more institutional SEO share allocations, and also more post-offer net buying. Third, institutions flip only a very small fraction of their SEO share allocations: 3.20 percent during the first two days post-SEO. However, this lack of flipping does not appear to be costly to institutional investors, since there is no significant difference between the extent of SEO underpricing and the realized profitability of institutional SEO share allocation sales. Fourth, institutional investors' post-SEO trading significantly outperforms a naive buy-and-hold trading strategy in SEOs. Further, the profitability of post-offer trading in SEOs where institutions obtained allocations is higher than that of trading in SEOs where they did not obtain allocations. Finally, more pre-offer institutional net buying and larger institutional SEO share allocations are associated with a smaller SEO discount. Overall, our results are consistent with institutions possessing private information about SEOs, and with an information production rather than a manipulative trading role for institutional investors in SEOs.
Keywords: Seasoned Equity Offerings, Institutional investors, Manipulative trading, Information production, SEO discount, Underpricing
JEL Classification: G32, G24, G14
Suggested Citation: Suggested Citation
Chemmanur, Thomas J. and He, Shan and Hu, Gang, The Role of Institutional Investors in Seasoned Equity Offerings (December 1, 2008). Journal of Financial Economics (JFE), Vol. 94, No. 3, pp. 384-411, 2009; AFA 2006 Boston Meetings Paper; NBER 2007 Market Microstructure Meetings Paper; EFA 2007 Ljubljana Meetings Paper. Available at SSRN: https://ssrn.com/abstract=686541