The paper examines whether insider trades that are made close to corporate equity issues contain information about the issue policies, specifically about the size of the proceeds collected and their subsequent use. We find that equity issuers characterized by more prevalent insider purchases tend both to raise less equity capital and to spend a larger portion of the cash proceeds immediately in comparison to issuers characterized instead by insider selling. Additional tests provide evidence that issuers exhibiting more insider buying spend immediately greater amounts of the issue proceeds on investments including capital expenditures and research and development. The findings are consistent with the view that issuers associated with more extensive insider buying tend to raise equity capital in response to funding needs, whereas issuers characterized more by insider selling do so for market timing purposes. Taken together, these results imply that top managers are consistent in their personal trading decisions and in the corporate policies they pursue.

This paper investigates the role of the financial environment in the stock market valuation of research and development (R&D) spending by firms. We examine the importance of equity financing relative to bank financing and the importance of both relative to the size of the economy on the stock market valuation of R&D expenditures. Empirical analysis of the Compustat Global Vantage firm-level data indicates that, the more market-based a financial system is, the more R&D expenditures are valued by the stock market. The degree of financial development does not appear to be important. Our results remain materially unchanged after controlling for numerous firm and country differences.