Using Insider Trading to Infer the Information Content of Equity-Selling Mechanisms

Download or read book Using Insider Trading to Infer the Information Content of Equity-Selling Mechanisms written by YiLin Wu and published by . This book was released on 2007 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: Extant research finds mixed empirical results regarding whether private placement firms are undervalued. Hertzel and Smith (1993) suggest that private placements are undervalued. On the other hand, Krishnamurthy et al. (2004) and Hertzel et al. (2002) show that, similar to public offering firms, private placement firms experience significant negative post-announcement stock price performance. This paper uses estimated residuals from the insider trade regressions (abnormal insider trading) to measure private information. Results show that the probability of making private placements increases with the abnormal insider purchases and decreases with the abnormal insider sales. This is consistent with the hypothesis that private placement firms are undervalued.