Essays on seasoned equity offerings : an examination of SEC's Rule 105.
Date of Issue2008
College of Business (Nanyang Business School)
The US Securities and Exchange Commission (SEC) replaced Rule 10b-21 with Rule 105 in April 1997 and shortened the short-sell-restricted period before seasoned equity offering (SEO). Rule 105 was adopted to reduce the unintended effects of short-sale constraints on informed trading and stock issuers' costs. In the present study, I examine the effectiveness of Rule 105 and find that instead of decreasing SEO discounts, which SEC expected, SEO discounts increased substantially after the adoption of Rule 105. In addition, after the implementation of Rule 105, price uncertainty increases significantly during the restricted period, but it decreases shortly before the restricted period. This finding supports my hypothesis that a shortened restricted period enables informed traders to sell short before the restrictions take effect.