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Stock hyping before auction-style SEOs: Are primary market investors misled?

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  • Gao, Shenghao
  • Liu, Jinzhao
  • Zhang, Qi
  • Zhou, Jun

Abstract

This study investigates the stock price pattern around seasoned equity offerings and the response of primary market investors to such a price pattern in an environment with weak investor protection. Using a sample of 1670 auction-style SEOs in China, we find stock prices exhibit an inverted-V pattern around SEO issue dates, increasing significantly before, peaking at, and then declining dramatically after issue dates. Further analysis shows that this price pattern can be explained by the managerial hyping hypothesis. With detailed information on investor bids submitted in the auctions, we find that investors' bid prices decrease while SEO discounts increase with pre-SEO price run-ups, indicating that primary market investors could identify SEO issuers' stock hyping tactic and react by submitting more conservative bid prices. We conclude that SEO issuers condition the market around SEO issue dates but this tactic does not help reduce issuers’ financing costs.

Suggested Citation

  • Gao, Shenghao & Liu, Jinzhao & Zhang, Qi & Zhou, Jun, 2023. "Stock hyping before auction-style SEOs: Are primary market investors misled?," International Review of Economics & Finance, Elsevier, vol. 88(C), pages 123-140.
    • Handle: RePEc:eee:reveco:v:88:y:2023:i:c:p:123-140
    DOI: 10.1016/j.iref.2023.06.023
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    More about this item

    Keywords

    Seasoned equity offerings; Managerial hyping; Investor bids;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

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