Michael J. Highfield

Sales of Secondary Shares in SEOs: A Comparison Across Top Managers, Other Insiders, and Outsiders

Using registered insider sales listed on the final prospectus of Seasoned Equity Offerings (SEO), we test managerial market timing ability and find that insider participation is directly related to overvaluation in the issuing firm. However, the negative market reaction to SEO announcements is not distributed equally across all insider classifications. Instead, our evidence suggests that registered insider sales by C-level executives or t heir beneficiaries are negatively received by the market. Alternatively, participation by other insiders or non-insiders has no short term market impact. In line with the initial market reaction, firms with registered C-level executive sales experience a significant long-run post-issue underp erformance in their abnormal stock and operating performance. That is, participation by other insiders or non-insiders has no short term market impact. The results are similar for post-iss ue stock and operating performance, and this finding is robust to alternative long-run performan ce methodologies. Overall, our evidence is consistent with the notion that price relevant information is asymmetrically distributed throughout insiders but is concentrated in C-level executives of new equity issuers.

The quiet period is making noise again

We examine the initial public offering quiet period following the implementation of NYSE and NASD rules extending the quiet period from 25 to 40 days for lead underwriters. While early studies found positive excess returns at the expiration of the quiet period, more recent studies suggest that these returns have disappeared. Controlling for simultaneity bias and changes in analyst behaviour, we investigate whether positive significant returns indeed no longer occur around the expiration of the quiet period. Overall, we find that the quiet period is making noise again.

The Tax Structure of Interest Rates: An Illusion?

The tax structure of interest rates, an observed downward sloping relationship between tax rates implied by relative municipal and taxable yields and time to maturity, remains a longstanding anomaly in financial economics. A recently published theory suggests that under simple conditions, in a world of interest rate uncertainty, relative yields can produce downward biased estimates of implied tax rates and incorrectly stated tax equivalent yields. Using numerical modeling techniques, I test this “Tax Structure Illusion” and find that a bias indeed exists and generally increases with maturity and interest rate volatility.