Hei Wai Lee

Evidence of Selling by Managers after Seasoned Equity Offering Announcements

Significant insider selling continues after a seasoned equity offering (SEO) is announced. This finding is consistent with earlier studies that equity offerings are undertaken by companies whose stock is overpriced. The study also suggests that the stock of firms that employ SEOs stays overpriced for several months after the offering.

Further Evidence on Insider Selling Prior to Seasoned Equity Offering Announcements: The Role of Growth Opportunities

Previous research documents significant abnormal net selling by insiders prior to seasoned equity offering announcements. This study documents that the abnormal net selling is significantly greater for growth firms than for mature firms. It also shows that growth firms experience poorer post-issue long-term price performance, which suggests greater overpricing for growth firms. Further analysis shows that greater insider selling prior to the offering announcement is associated with a greater price run-up prior to the announcement and is not associated with a more negative market reaction to the announcement. Overall, the results suggest that investors may be overly optimistic about future prospects of growth firms. Copyright Blackwell Publishers Ltd 1999.

Effects of Sovereign Risk on Duration: Evidence from European and Latin American Sovereign Bond Markets

We examine effects of sovereign risk on bond duration in European and Latin American sovereign bond markets over the period 1996-2011. We compare the sovereign risk-adjusted duration for U.S. dollar-denominated sovereign bonds with their Macaulay duration for both investment- and speculative-grade bonds. We find that the sovereign risk-adjusted duration is significantly shorter than its Macaulay counterpart for all bonds, regardless of the bond rating and maturity. Further, the “shortening” effect of sovereign risk on duration is generally stronger among bonds of lower ratings. During the recent global financial crisis, the “shortening” effect was dampened for quality sovereign bonds. But the sovereign risk effect on duration was intensified for BBB and BB rated bonds, reflecting investors’ perception of increasing likelihood of default by issuing nations. Results are robust when CDS prices are used as a proxy for changes in sovereign risk. Moreover, the regional analysis shows that sovereign risk shortens duration much less for sovereign bonds issued by the EU and Latin American countries than for non-EU member counterparts. Our study demonstrates the importance of, and provides a practical guide for, bond portfolio managers to account for sovereign risk in managing interest rate risk exposure in their investments.

Managing risk in sovereign bond portfolios: The impact of sovereign and call risks on duration

Abstract nThe study examines the joint effect of sovereign and call risks on the duration of callable sovereign bonds over the period 1996–2011. The results indicate that the sovereign risk-adjusted duration is significantly shorter than its Macaulay counterpart for U.S. dollar-denominated investment-grade callable sovereign bonds. Further, the “shortening” effect of sovereign and call risks on duration is generally stronger among bonds of lower ratings. Similar results are obtained when CDS prices are used as a proxy for changes in sovereign risk. Results from this study emphasize the importance of considering the joint effect of sovereign and call risks in managing the interest rate risk exposure in fixed income investments.

Sovereign risk and its changing effects on bond duration during financial crisis

We examined the effects of sovereign risk on bond duration in European and Latin American sovereign bond markets over the period 1996 to 2011. We compared the sovereign risk-adjusted duration with the Macaulay duration for both investment- and speculative-grade US dollar-denominated sovereign bonds. We found that the sovereign risk-adjusted duration is significantly shorter than its Macaulay counterpart for all ratings, and the ‘shortening’ effect is stronger for lower rated bonds, which generally intensified during the recent financial crisis. Results are robust when credit default swap (CDS) prices are used as a proxy for changes in sovereign risk. This study provides evidence for advocating the importance of adjusting the bond duration for sovereign risk. More important, this study provides a practical methodology for estimating a sovereign risk-adjusted duration measure for managing international bond portfolios.