Order Flow Patterns around Seasoned Equity Offerings and their Implications for Stock Price Movements

Abstract

. We appreciate the constructive and thoughtful feedback of Antonio Bernardo, Rossen Valkanov, and Neal Stoughton. We express special thanks to Xiao Chen of the UCLA Academic Technology Services for providing useful programming assistance. Abstract Order Flow Patterns around Seasoned Equity Offerings and their Implications for Stock Price MovementsIn this study, we employ order imbalance measures to provide evidence that there exists an individual/institutional dichotomy in reactions to seasoned equity offerings (SEOs).The evidence supports the notion that small, possibly naïve, individual investors keep trading SEO stocks aggressively while the returns of these stocks reverse in the post-issue period. Investors appear to be tardy in adjusting their overoptimism, and their trades systematically lag the return response. It appears to take more than two years for small individual investors to adequately revise their overoptimistic views. Consequently, the SEO portfolios that individual investors buy on net strongly underperform relative to the size-matching nonissuer portfolios as well as to the SEO portfolios that institutional investors buy on net in the post-issue period.

Fifty years of finance research in the Asia Pacific Basin

“…Other notable authors include Kho and Stulz () who discuss banks, the international monetary fund and the Asian crisis, O'Hara () examining market design for developing countries, Lucas () who examines the investment of public pensions in stock markets and its effect on risk sharing, capital formation and public policy, Ritter () who provides a review of behavioural finance, Titman et al . () who examine capital investments and stock returns in Japan, Huh and Subrahmanyam () who examine order flow patterns around seasoned equity offerings and Chen () who examines banking reforms in the twenty‐first century.…”

Behavioural Finance: A Review and Synthesis

“…A relevant question is the following. Given that return reactions to corporate events are not complete for a substantial period after the event, which agents are failing to process information properly?Huh and Subrahmanyam (2005) attempt to shed light on this issue by examining trading activity and institutional holdings around SEOs. They find that small investors (as reflected in trade number imbalances) appear to continue to be net buyers of SEO stocks even after the SEO.…”

Financial Intermediation and the Rights Offer Paradox

“…Following Chordia and al. (2002) and Huh and al. (2005), we use those order imbalance measures in order to obtain more information on the differential behavior of small vs. large traders.…”

“…Filling this gap, Huh and al (2005) go beyond the return analyses and investigate trading behaviors around seasoned equity offerings in the U.S.. They used order imbalance measures to provide evidence that there is a cross-sectional heterogeneity in investor reactions to SEOs.…”

“…More precisely, we investigate the stock and the rights market during the offer period by analyzing trading volumes, trade sizes but also trade number and euro volume order imbalances. Those measures were computed using the Lee and Ready algorithm (1991) and indicate differences between small and large investors (Huh. And al (2005)).…”