DISPOSITION EFFECT AND PUBLIC SECONDARY EQUITY OFFERINGS

Authors


  • We are grateful to an anonymous referee for helpful comments and suggestions. We also thank Kenneth Borokhovich and the seminar participants at Cleveland State University and the University of Missouri–St. Louis for useful comments. All remaining errors are our own.

Abstract

Shareholders selling shares in public pure-secondary equity offerings are affected by the disposition effect and tend to sell past winners. Selling shares in these offerings is associated with significant indirect offer costs. On average, shares are offered at a 5.5% discount from the market price. Moreover, shares of offering firms are about 8% underpriced. Offer discounts and underpricing are positively related to the proxy for the disposition effect. Our findings are consistent with the proposition that the disposition effect increases the supply of winning stocks and depresses their prices.

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