The Informational Value of U.S. Securities Registration: Evidence from Secondary Public Offerings

Abstract

Adverse selection costs are a significant component of the cost of issuing public securities that arise from information asymmetry between issuers and investors. An extensive literature has emerged on how regulatory and market institutions can reduce these costs. Yet little is known about whether information asymmetry actually declines around the offering process, whether the decline persists, and how it affects the cost of capital. This is partly due to a previous lack of models and measures of information asymmetry. We address this gap in the literature by presenting evidence that public companies experience significant declines in information asymmetry around seasoned offerings, and that the magnitude of the declines can be explained by factors related to the value of information improvement, and its cost, around the offer date. We find relatively large information improvement around offers characterized by equity (versus debt), traditional regulatory review (versus streamlined shelf offerings), and companies that are infrequent offerors (versus frequent recent offers) of securities. In addition, we evaluate the possible cause of the sustained improvement and its consequence for cost of capital, following the previous literature. What we find is that analyst coverage grows significantly around the seasoned offering process by amount that is positively related to the measured reduction in information asymmetry. These findings are robust and consistent with our information improvement hypothesis in which seasoned offering transactions have a sustained effect on the information environment. Both the registration process and heightened market scrutiny, such as through increased analyst coverage, play a strategic role in the evolution of investor information around the offering. We also document a relation between measures of information improvement and Jensen's alpha (obtained from a four factor model) which is consistent with a decrease in cost of capital due to a better information environment. This is consistent with Easley and O'Hara's model on information asymmetry as a source of priced risk.