Corporate Governance and Seasoned Equity Offerings: Offer Methods and Flotation Costs

Abstract

In this paper, we examine whether there is a relationship between the internal corporate governance of a firm and the method by which seasoned equity offerings are made. Extant research posits the view that firms offering equity securities via shelf offerings suffer from an under-certification problem. This is due to the fact that equity issued under shelf offerings is often offered at short notice giving investment bankers inadequate time to conduct due diligence. The problem of under-certification is further exacerbated in the now widely prevalent accelerated offers method of issuing SEOs. We suggest that firms may self-certify their quality by pursuing high standards of internal corporate governance. Our empirical evidence supports this view. We also examine whether corporate governance quality influences the issuer’s decision to use the accelerated offers method of issuing SEOs. Our empirical evidence supports the view that well-governed firms tend to issue accelerated offers as compared to poorly governed firms. Furthermore, we also examine whether flotation costs are influenced by a firm’s internal corporate governance. We find that flotation costs are significantly lower for firms with good governance after controlling for other determinants of flotation costs. We find that audit fee and the use of big4 auditor serve as alternate certification devices. Of the different components of internal corporate governance studied, board composition and effectiveness is most robust to the inclusion of alternate certification devices. It appears that good governance facilitates speedy capital raising and reduces flotation costs. Our findings are potentially useful to corporate managers, investment bankers and regulators.