Seasoned debt and equity issues for investment and the information content of insider trades

This dissertation examines the role of insider trading activity in explaining announcement price effects of seasoned debt and equity issues for investment. As has been widely discussed in the finance literature, the announcement of new financing for investment purposes can convey good or bad news depending on the motivation behind the issue, the profitability of the investment, and the stage of firm development. If insider trading can effectively reduce information asymmetry about investment opportunities at the time of corporate financing announcements, markets can be expected to react less negatively to these announcements. Corporate insiders know more about the expected impact of current earnings and future investments than anyone else. Consequently, the value and direction of their personal trading should reflect, to some extent, their expectation of the value of the firm in the future. John and Mishra’s [1990] signaling model explains how insider trading can act as a joint signal along with a corporate announcement in sending information to the market efficiently. A cross-sectional analysis is conducted to test the hypothesis that announcements of new financing (debt or equity) for investment that are preceded by insider buying are accompanied by a less negative stock price response than issues that are preceded by insider selling. This analysis is followed by several tests designed to examine the robustness of this relationship. The results of this study suggest a correlation between trading and announcement period price effects for equity issues that is consistent with this hypothesis, though the effect is more pronounced for smaller firms. There appears to be no connection between insider trading and the announcement period reaction to debt issues, however.

Name thesis:degree_name

Ph. D.

Level thesis:degree_level

doctoral

Discipline thesis:degree_discipline

Finance, Insurance, and Business Law

Department dc:contributor.department

Finance, Insurance, and Business Law

Grantor dc:publisher

Virginia Tech

Year dc:date.issued

1993

Author dc:creator

• Serrano, Jan Maroney

Chair dc:contributor.committeechair

• Thompson, G. Rodney

Committee members dc:contributor.committeemember

• Bonomo, Vittorio A.
• Keown, Arthur J.
• Kumar, Raman
• Shome, Dilip K.

Statement dc:rights

• In Copyright

Licence dc:rights.uri

• http://rightsstatements.org/vocab/InC/1.0/

Language dc:language.iso

en

Dc Identifier Other

etd-12222005-090703

OAI identifier oai:identifier

oai:vtechworks.lib.vt.edu:10919/40474