Ownership Structure and Monitoring around Secondary Offerings

Secondary offerings represent a unique setting to examine investors’ perception of the value of monitoring intensity around changes in block ownership. I find blockholders present at 97% of firms with a secondary offering over 1998-2006. These blockholders participate in 87% of secondary offerings and offer the majority of secondary shares in 75% of these offerings. Using a unique, hand-collected dataset of ownership structure, I empirically test two hypotheses explaining secondary offering announcement returns and underpricing based on seller heterogeneities: the information hypothesis and the monitoring hypothesis. The results largely support the monitoring hypothesis. Secondary offerings by close, active monitors who frequently have significant board representation experience higher underpricing and more negative announcement returns than passive, indirect monitoring blockholders. I also find greater underpricing and more negative announcement returns for close monitors than insiders, and no evidence of increased near-term earnings misses. I interpret these results as the first evidence that markets view secondary offerings by close monitors as reductions in the shared benefits of value-enhancing monitoring rather than the conveyance of negative information about future profits. I find scarce evidence that stockholders negatively view the loss of a passive blockholder. I also provide some evidence that announcement returns for secondary offerings by close monitors cannot solely be explained by a temporary liquidity shock.