SEO valuation and insider manipulation of R&D

• Main Authors: Robert M. Hull, Sungkyu Kwak, Rosemary L. Walker
• Format: Article
• Language: English
• Published: LLC "CPC "Business Perspectives" 2016-07-01
• Series: Investment Management & Financial Innovations
• Online Access: https://businessperspectives.org/images/pdf/applications/publishing/templates/article/assets/7305/imfi_en_2016_02cont2_Hull.pdf

We examine a sample of 674 SEOs from 1999-2010 where reduced R&D spending is significantly associated with the lowering of insider ownership proportions. With this association established, we derive an R&D manipulation variable measuring underinvestment in R&D. We add to the SEO-R&D literature by examining the relation between R&D underinvestment and common stock valuation around SEOs. In contrast to the IPO research, we do not find that underinvestment in R&D leads to greater SEO stock valuations during the offer price setting process. Like the IPO research, we find that underinvestment in R&D leads to lower stock valuations for short-run post-offering tests. In contrast to the long-run IPO results, we find a significant association between R&D manipulation and stock valuation for long-run post-offering tests where underinvestment in R&D is associated with lower stock valuations. We also find the five % owner group for SEOs is important in explaining R&D manipulation and discover that underpricing for SEOs is not related to R&D manipulation. These latter two findings are different from IPOs. In conclusion, SEOs can be quite different from IPOs when examining the association between the insider manipulation of R&D and stock valuation