Accelerated Seasoned Equity Offerings: Motives and Issuer-Underwriter Interactions

Abstract

We examine interactions between firms issuing seasoned equity and their underwriters. Our approach contrasts with many studies which assume the interests of issuing firms and their underwriters are aligned, thus rendering distinctions between the two parties unimportant. We specifically examine interactions between issuers and underwriters to a) characterize the interactions; b) investigate how such interactions affect the stock issue; and c) see what interactions suggest about motives for issue. We examine the form of seasoned equity offering (SEO) that is now most prevalent in the US, Canada and Europe: accelerated SEOs. In particular, we look at Canadian bought deal SEOs - the original accelerated offering which is thus the most established. We use multiple empirical techniques: we survey both underwriters and CFOs of issuing firms (92 responses in total) and we also use secondary data to see if it corroborates their responses. There are three main findings. First, we find underwriters play a much more significant role than has been empirically documented. Underwriters are instrumental in initiating issues, as well as determining the terms of the underwriting contract. Second, we provide empirical support for the Efficient Contracting Hypothesis which says that few terms of the underwriting contract are negotiated. Finally, we show that speed of issue is the key consideration of issuers, consistent with both the market timing and financial constraint motives for SEOs, but that other evidence for these motives is unconvincing. Instead we find evidence consistent with underwriter profit goals motivating issues. This finding of the importance of underwriter goals supports our intuition that it is important not to conflate the interests of the two parties to the underwriting contract.