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Order Flow Patterns around Seasoned Equity Offerings and their Implications for Stock Price Movements


In this study, we employ order imbalance measures to provide evidence that there exists an individual/institutional dichotomy in reactions to seasoned equity offerings (SEOs). The evidence supports the notion that small, possibly naıve, individual investors keep trading SEO stocks aggressively while the returns of these stocks reverse in the post-issue period. Investors appear to be tardy in adjusting their overoptimism, and their trades systematically lag the return response. It appears to take more than two years for small individual investors to adequately revise their overoptimistic views. Consequently, the SEO portfolios that individual investors buy on net strongly underperform relative to the size-matching nonissuer portfolios as well as to the SEO portfolios that institutional investors buy on net in the post-issue period.

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