Regulation and information asymmetry: Evidence from the performance of industrial and utility firms issuing seasoned equity in the USA
Purpose – This paper seeks to examine the potential for regulation to reduce information asymmetries between firm insiders and outside investors. Design/methodology/approach – Extensive prior research has established that there are substantial effects of information asymmetry in seasoned equity offers (SEOs). The paper tests for a mitigating effect of regulation on such information asymmetries by examining differences in long-run operating performance, changes in that performance, and announcement-period stock returns between unregulated industrial firms and regulated utilities that issue seasoned equity. The authors also segment the samples by firm size, since smaller firms are likely to have greater asymmetries. Findings – Consistent with regulated utility firms having lower levels of information asymmetry, they have superior changes in abnormal operating performance than industrial firms pre- to post-issue and their announcement period returns are significantly less negative. These findings are most pronounced for the smallest firms, firms likely to have the greatest information asymmetries and where regulation could have its greatest effect. Research limitations/implications – The paper does not examine costs of regulation. Thus, future research could seek to measure the cost/benefit trade-off of regulation in reducing information asymmetry. Also, future research could examine cross-sectional differences between different industries and regulated utilities. Practical implications – Regulation reduces information asymmetry. Thus, regulation or mandated disclosure may be appropriate in industries/markets where information asymmetry is severe. Originality/value – This paper is the first to compare the operating performance of regulated and unregulated SEO firms.
Equity issuance, Information asymmetry, Performance, Regulation, Utilities
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