Market Reaction and Insider Trading Around the Announcements of Equity Issues: Evidence from Nigeria
The need to understand the stock market response to announcements of new issues of corporate securities and the importance of curtailing the fraudulent operation of corporate insiders is paramount. In spite of that, little research attention was given to such reactions in Nigeria. Consequent upon that, this study sought to empirically examine insider trading around seasoned equity offering announcements by companies in Nigeria. Employing the event study methodology abnormal returns were computed as the residuals of the market model. Utilising a total of 62 announcements by 47 companies listed on the Nigerian stock exchange from 1st January, 2006 to 31st December, 2013. Consistent with prior studies the study documented negative significant cumulative abnormal returns prior to the announcement date and a positive significant cumulative abnormal return on the announcement date. The significant cumulative abnormal returns recorded in the period prior to the announcement date could be driven by insider dealings and the presence of an abnormal return suggests the semi-strong form inefficiency of the Nigerian market.
Mohammed Aminu Bello,
Market Reaction and Insider Trading Around the Announcements of Equity Issues: Evidence from Nigeria, International Journal of Accounting, Finance and Risk Management.
Vol. 1, No. 1,
2016, pp. 25-32.
Agung, I. G. N. (2009). Time series data analysis using Eviews. Singapore: John Wiley & Sons Limited.
Akerlof, G. (1970). The market for “Lemons”: Quality and the market mechanism. Quarterly Journal of Economics, 84(3), 488-500.
Asquith, P., & Mullins, D. (1986). Equity issues and offering dilution. Journal of Financial Economics, 15, 61-89.
Ball, R. & Brown, P. (1968). An empirical evaluation of accounting income numbers. Journal of Accounting Research, 6, 159-178.
Barclay, M., &Litzenberger, R. (1988). Announcement effects of new equity issues and the use of intraday price data. Journal of Financial Economics, 21, 71-100.
Bayer, S. O. (2008). Announcement effect in seasoned equity offerings in Istanbul stock exchange, Unpublished Masters Thesis, Eylul University.
Betzer Andre and TheissenErik(2009). Insider Trading and Corporate Governance: The Case of Germany, European Financial Management, 15 (2) 402—429.
Bhana, N. (1998. Share price reaction to announcements of equity financing by companies listed on the Johannesburg stock exchange. Investment Analysts Journal, 48, 33-42.
Bhattacharya, U., Daouk, H., Jorgenson, B. &Kehr, C. H., 2000. “When an Event is not anEvent: The Curious Case of an Emerging Market”, Journal of Financial Economics, 55, pp. 69-101.
Brooks, C. (2008). Introductory econometrics for Finance (2nded.). Cambridge: Cambridge University Press.
Brown, S. J. & Warner, J. B. (1985). Using daily stock returns: The case of event studies. Journal of Financial Economics, 14, 3-31.
Castillo, A. (2004). The announcement effect of bond and equity issue: Evidence from Chile. Estudios de Economia, 31(2), 177-205.
Chauhan, Y., Chaturvedula, C. &Iyer, V. (2014).Insider Trading, Market Efficiency and Regulation: a Literature Review.The Review of Finance and Banking 06 (1) 007—014.
Cheuk et al (2006). Insider trading in Hong Kong some stylized facts, Pacific-Basin Finance Journal 14 (1) 73-90.
Cohen, Lauren, Christopher Malloy, and Lukasz Pomorski (2012). ""Decoding inside information."" The Journal of Finance 67. (3): 1009-1043.
De Medeiros, O. & Matsumoto, A. S. (2006). Market reaction to stock issues in Brazil: Insider trading, volatility effects and the new issues puzzle. Investment Management and Financial Innovations, 3(1), 142-150.
Denis, D. J. (1994). Investment opportunities and the market reaction to equity offerings. Journal of Financial and Quantitative Analysis, 24(2), 159-177.
Dhatt, M.S., Kim, Y.H. and Mukherji, S. (1996) Season equity issues: The Korean experience. Pacific – Basin Finance Journal, 4: 31–43.
Dickey, D. A., &Fulter, W. A. (1979). Distribution of estimators for time series regressions with a unit root. Journal of the American Statistical Association, 74, 427-431.
Dogu, M., Karacaer, S., & Karan, M. B. (2010). Empirical testing of insider trading in the Istanbul stock exchange. International Research Journal of Finance and Economics, 55, 97-107.
sFama, E. (1970). Efficient capital markets: A review of theory and empirical work. Journal of Finance, 25, 383-417.
Gajewski, J.F. and Ginglinger, E. (2002) Seasoned equity issues in a closely held market: Evidence from France. European Finance Review, 6 (3): 291–319.
Gombola, M. J., Lee, H. W., & Liu, F. (1999). Further evidence on insider selling prior to seasoned equity offering announcements: The role of growth opportunities. Journal of Business Finance & Accounting, 26(5-6), 621-649.
Gu, F. andLi, Q.J. Insider Trading and Corporate Information Transparency. The Financial Review, 47 645–664.
Hertzel, M., Lemmon, M., Linck, J., & Rees, L. (2002). Long-run performance following private placements of equity. Journal of Finance, 57(6), 2597-2616.
Jaffe, J. F., (1974). “Special Information and Insider Trading”, The Journal of Business, 47(3),pp.410-428.
Jeanneret, P. (2003). Seasoned equity offerings and their impact on the firm value. Unpublished PhD Thesis, University of Neuchatel.
Jensen, M. C. (1986). Agency costs of free cash flow, corporate finance and the market for takeovers. American Economic Review, 76, 323-329.
Kahle, K. M. (1995). Insider trading and new securities issues. Ohio State University Working Paper.
Kang, J., Kim, Y. & Stulz, R. (1999). The under reaction hypothesis and the new issue puzzle: evidence from Japan. Review of Financial Studies, 12, 519–534.
Lakonishok, J. & Lee, I., 2001. “Are Insider Trades Informative?”, The Review of FinancialStudies, 14(1), pp. 79-111.
Lee, D., & Karpoff, J. M. (1991). Insider trading before new issue announcements: Journal of Financial Management, 20(1), 18-26.
Lee, I. (1997). Do firms knowingly issue overvalued equity? Journal of Finance, 52(4), 1439-1466.
Lee, I. (2002). Insider trading and performance of seasoned equity offering firms after controlling for exogenous trading needs. Quarterly Journal of Economics and Finance, 42, 181-211.
Limpaphayom, P. and Ngamwutikul, A. (2004). Ownership structure and post-issue operating performance of firms conducting seasoned equity offerings in Thailand. Journal of Economics and Finance, 28 (3): 307-332.
Lorie, J. & Niederhoffer, V., 1968. “Predictive and Statistical Properties of Insider Trading”,Journal of Law and Economics, 11, pp.35-51.
Loughran, T. & Ritter, J. (1995). The new issues puzzle. Journal of Finance, 50, 23-51.
Lucas, D. J. and McDonald, R. L. (1990) Equity issues and stock price dynamics. Journal of Finance, 45 (4): 1019-1043.
Mackinlay, A. C. (1997). Event studies in economics and finance. Journal of Economic Literature, 35(1), 13-39.
Miller, M. H., & Rock, K. (1985). Dividend policy under asymmetric information. Journal of Finance, 40(4), 1031-1051.
Mikkelson, W. H. and Partch, M. (1986) Valuation effect of security offerings and the issuance process. Journal of Financial Economics, 15 (1): 31-60.
Modigliani, F. & Miller, M. (1958). The cost of capital, corporate finance, and the theory of investment, American Economic Review, 48, 261-297.
Mohammed, I., (2012). Stock Price Reaction to Equity Issues Announcement by DepositMoney Banks in Nigeria. Unpublished M. Sc. Thesis, Ahmadu Bello University, Zaria.
Morse, D. (1980). Asymmetric information in securities markets and trading volume. Journal of Financial and Quantitative Analysis, 1129-1148.
Myers, S. C., & Majluf, N. S. (1984). Corporate financing and investment decisions when firms have information that investors do not have. Journal of Financial Economics, 13(2), 187-221.
Ravina, E., and Sapienza, P. (2010). What do independent directors know? Evidence from their trading. Review of Financial Studies, 23 (3) 962-1003.
Rozeff, M. S., & Zaman, M. A. (1988). Market efficiency and insider trading: New evidence. Journal of Business, 25-44.
Salamudin, N., Ariff, M. & Nassir, A. (1999). Economic influence on rights issue announcement behaviour in Malaysia. Pacific-Basin Finance Journal, 7, 405–427.
Scholes, M. (1972). The market for securities: Substitution versus price pressure and the effects of information on stock prices. Journal of Business, 45(2), 179-211.
Seyhun, N. H., 1986. “Insiders’ Profits, Costs of Trading and Market Efficiency”, Journal of Financial Economics, 16, pp. 189-212.
Shahid, H., Xinping, X., Mahmood, F., &Usman, M. (2010). Announcement effects of seasoned equity offerings in China. International Journal of Economics and Finance, 2(3), 163-169.
Soucik, V. and Allen, D.E. (1999b). The performance of seasoned equity issues in a risk adjusted environment. Working paper, Edith Cowan University 389.
Tan, R. S. K., Chang, P. L. and Tong, Y. H. (2002) Private placements and rights issues in Singapore. Pacific-Basin Finance Journal, 10 (1): 29-54.
Tsangarakis, N. (1996). Shareholder wealth effects of equity issues in emerging markets: Evidence from rights offerings in Greece. Financial Management25 (3), 21–32.
Walker, M. D. and Yost, K. (2007) Seasoned equity offerings: What firms say, do, and how the market reacts? Working paper, Social Science Research Network.
Wu, X., Wang, Z., & Yao, J. (2005). Understanding the positive announcement effects of private equity placements: New insights from Hong Kong data. Review of Finance, 9, 385-414.