Abstact
Unlike the IPO research, the SEO research has not examined the relation between insider behavior and R&D changes around offering dates. We tread new ground by examining this relation for SEOs. Like the IPO research, we find a positive association between changes in R&D and changes in insider ownership proportions. However, the comparison of SEOs with IPOs fails to generate complete agreement. For example, our insider results for SEOs are driven as much by five percent owners as by directors and officers, while IPO results are driven by directors and officers. Furthermore, while the IPO research and our SEO study both find evidence for the earnings manipulation hypothesis, our SEO results also offer support for the R&D signaling hypothesis. This latter support is due strictly to the five percent ownership group. Additionally, our insider results for SEOs indicate that endogeneity is just as pronounced during non-bubble periods as bubble periods. For IPOs, the evidence indicated endogeneity was a bubble period phenomenon. The main factor in explaining differences between SEOs and IPOs involves the five percent group consisting of large institutional owners who can amass large holdings and, along with directors and officers, control decision-making around SEOs. This decision-making cannot only reduce R&D to inflate earnings when insiders are lowering their ownership but can also increase R&D when insiders are prone to increase their ownership based on positive sentiments. For this positive situation, firms are more likely to be increasing capital expenditures with the five percent owners pushing this agenda.
Similar content being viewed by others
References
Aoki R, Reitman D (1992) Simultaneous signaling through investment in an R & D game with private information. Games Econ Beh 4:327–346
Beaver W, Engel E (1996) Discretionary behavior with respect to allowances for loan losses and the behavior of security prices. J Account Econ 22(1–3):177–206
Berger P (1993) Explicit and implicit tax effects of the R & D tax credit. J Account Res 31(2):131–171
Caton G, Chiyachantana C, Chua C, Goh J (2011) Earnings management and seasoned bond offerings: do managers mislead the bond market? J Financ Quant Anal 46(3):687–708
Darrough M, Rangan S (2005) Do insiders manipulate earnings when they sell their shares in an initial public offering? J Account Res 43(1):1–33
Grinblatt M, Hwang C (1989) Signaling and the pricing of new issues. J Finance 44(2):393–420
Guo R, Lev B, Zhou N (2005) The valuation of biotech IPOs. J Account Audit Finance 20(4):423–459
Guo R, Lev B, Shi C (2006) Explaining the short− and long-term IPO anomalies in the US by R & D.”. J Bus Finance Account 33(3–4):550–579
Hand J, Hughes P, Sefcik S (1990) Insubstance defeasances: security price reactions and motivations. J Account Econ 13(1):47–89
Himmelberg C, Peterson B (1994) R & D and internal finance: a panel study of small firms in high-tech industries. Rev Econ Stat 76(1):38–51
Hull R, Kwak S, Walker R (2011) Insider R & D manipulation around IPOs. Working Paper Series No. 133. Washburn University School of Business
Hull R, Kwak S, Walker R (2012) Explanation for market response to seasoned equity offerings. J Econ Finance 36(3):634–661
Jaffe A (1986) Technological opportunity and spillovers of R & D: evidence from firms’ patents, profits, and market value. Amer Econ Rev 76(5):984–1001
Kim W, Weisbach M (2008) Motivations for public equity offers: an international perspective. J Financ Econ 87(2):281–307
Leland H, Pyle D (1977) Information asymmetries, financial structure, and financial intermediation. J Finance 32(2):371–387
Olsen L, Zaman M (2013) Insider trading and motivations for earnings management. J Account Finance 13(3):51–66
Qian H, Zhong K, Zhong Z (2012) Seasoned equity issuers’ R & D investments: signaling or overoptimism. J Financ Res 35(4):553–580
Roychowdhury S (2006) Earnings management through real activities manipulation. J Account Econ 42(3):335–370
Sawicki J, Shrestha K (2008) Insider trading and earnings management. J Bus Finance Account 35(3–4):331–346
Shi L, Zhang H (2012) Can the earnings fixation hypothesis explain the accrual anomaly? Rev Account Stud 17(1):1–21
Shivakumar L (2000) Do firms mislead investors by overstating earnings before seasoned equity offerings? J Account Econ 29(3):339–371
Sloan R (1996) Does stock price fully reflect information in accruals and cash flows about future earnings? Account Review 71(3):289–315
Stein J (1989) Efficient capital markets, inefficient firms: a model of myopic corporate behavior. Quarterly J Econ 104(4):655–674
Subramanyam KR (1996) The pricing of discretionary accruals. J Account Econ 22(1–3):249–281
Trueman B (1986) The relationship between the level of capital expenditures and firm value. J Financ Quant Anal 21(2):115–129
Walker M, Yost K (2008) Seasoned equity offerings: what firms say, do, and how the market reacts. J Corp Finance 14:376–386
Author information
Authors and Affiliations
Corresponding author
Rights and permissions
About this article
Cite this article
Hull, R.M., Kwak, S. & Walker, R.L. Insider behavior and R&D changes around seasoned equity offerings. J Econ Finan 40, 258–276 (2016). https://doi.org/10.1007/s12197-014-9303-5
Published:
Issue Date:
DOI: https://doi.org/10.1007/s12197-014-9303-5