Abstract
Despite high levels of asymmetry of information, firms that issue SEOs within a year of their IPO (follow-on SEOs) are able to offer shares at a lower discount compared to more mature firms. We provide evidence that this seeming contradiction can be explained by a very high degree of demand for the follow-on offering. We find that the likelihood of issuing a follow-on SEO is significantly related to the level of institutional demand and that discounts are lower for follow-on SEOs in which institutional demand is high. We also consider the joint effect of cash holdings and follow-on SEOs on discounts, since firms that have recently gone public tend to hold high levels of cash. Underpricing is higher for firms with elevated pre-offer levels of cash, which is consistent with market timing predictions. However, this relation is mitigated for both follow-on SEOs and issues that also have high share demand.
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