Sinan Gokkaya

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.

Are All Analysts Created Equal? Industry Expertise and Monitoring Effectiveness of Financial Analysts

We examine whether analysts’ prior industry experience influences their ability to serve as effective external firm monitors. Our analyses of firms’ financial disclosure quality, executive compensation and CEO turnover decisions portray a consistent picture that related pre-analyst industry experience is of critical importance for analysts to play an effective monitoring role. Coverage by analysts with such experience is associated with reduced earnings management, lower probability of committing financial misrepresentation, less CEO excess compensation, and higher performance sensitivity of CEO turnover. We also provide evidence on several plausible mechanisms through which industry expert analysts exert monitoring efforts and limit managerial opportunism.

Asymmetric Revisions to Primary and Secondary Shares in Seasoned Equity Offerings

This paper examines the relation between revealed market demand and insider amendments to the number of primary and secondary shares offered during the seasoned equity offering (SEO) process. We define strong (weak) market demand for an SEO as a positive (negative) buy-and-hold abnormal return over the registration window. We find that insiders make amendments to primary and secondary shares conditional on the market demand revealed in the SEO registration period, but that the frequency, direction, and size of the amendments are not consistent across the two types of shares. For instance, insiders amend the prospectus to significantly decrease (increase) the number of secondary shares when the revealed market demand during the registration period is weak (strong). Amendments to originally filed primary shares are less prevalent. In addition, downward revisions in primary shares are unrelated to the market demand, and are less likely to occur the higher the pre-announcement stock price run-ups. Upward revisions in primary shares, however, are sensitive to strong market demand revealed in the registration period. Finally, when insiders amend the prospectus to increase (decrease) secondary shares, they either keep the number of primary shares constant, or increase (decrease) secondary shares disproportional to primary shares. These results are consistent with insiders employing a demand-conditioned adjustment strategy to secondary shares, as well as acting opportunistically to maximize personal wealth.

The Boss Knows Best: Directors of Research and Subordinate Analysts

Research departments are managed by Directors of Research (DORs). Subordinate analysts working for higher quality DORs provide superior earnings forecasts that elicit stronger market reactions, better investment recommendations, and have better career outcomes. For the broker, higher quality DORs drive more trading commissions. Economically, analysts benefit the most from DOR-analyst industry alignment resulting from DORs’ former analyst experience. We provide several tests to mitigate endogeneity concerns and explore various mechanisms to explain these results. Overall, our paper identifies a unique channel whereby industry-specific and general human capital of top management filters through to individual subordinates and consequently improves organizational performance.