Management Quality and Equity Issue Characteristics: A Comparison of SEOs and IPOs

Abstract

We use a unique sample of hand-collected data on the management quality of firms making SEOs or IPOs to analyze the relationship between the management quality of a firm and its SEO characteristics, and to compare the effect of management quality on equity issue characteristics in SEOs and IPOs. We hypothesize that higher quality managers are more credible to outsiders, thereby reducing the information asymmetry facing their firm in the equity market and outsiders’ information production costs about the firm. Thus, equity issues of firms with higher management quality will be associated with more reputable underwriters, smaller underwriting spreads and other expenses, and smaller discounts (for SEOs). Further, since better managers are able to select better (larger NPV for a given scale) projects, higher management quality will also be associated with larger offer sizes. Finally, since we expect SEO firms to suffer from a smaller extent of information asymmetry compared to IPO firms, the above effects will be smaller for SEO firms compared to IPO firms. Our empirical results support the above hypotheses. Our direct tests of the relationship between management quality and information asymmetry, and our comparison of information asymmetry in SEOs versus IPOs, provide further support for the above hypotheses.