Specification analysis of corporate equity financing decision: A conditional residual approach

This article revisits the debate on the nature of private placements by specifying that informed insiders make trading decisions in the secondary market and equity issuance decision in the primary equity market (Lee and Wu (2008)). This article uses conditional residuals from the insider trading regression (abnormal insider trades) and conditional residuals from equity financing choice regression (unexpected equity financing choice) to measure private information. An important advantage of conditional correlation coefficient approach over the two-stage approach (Lee and Wu 2008) in testing the presence of asymmetric information is that the former is bounded by -1 and 1 and thus permits cross-sectional comparisons the relatedness between abnormal insider trades and unexpected equity financing choice. ? 2008 Springer Science+Business Media, LLC.