Underpricing Of Seasoned Equity Offerings Research Articles

Soft Information and the Underpricing of REIT Seasoned Equity Offerings

Using a sample of 1,429 seasoned equity offerings (SEOs) by real estate investment trusts (REITs), we use content analysis to test whether the soft information in a company's offering prospectus influences SEO underpricing. After controlling for relevant variables, we find that companies that use more positive (negative) words in their filings are negatively (positively) related to SEO underpricing. We posit that in REIT SEOs more positive and fewer negative words decrease investor pricing uncertainty (fear) of the offer and as a result experience less underpricing.

The Role of Investor Attention in Seasoned Equity Offerings: Theory and Evidence

Models of seasoned equity offerings (SEOs) such as Myers and Majluf (1984) assume that all investors in the economy pay immediate attention to SEO announcements and the pricing of SEOs. In this paper, we analyze, theoretically and empirically, the implications of only a fraction of investors in the equity market paying immediate attention to SEO announcements. We first show theoretically that, in the above setting, the announcement effect of an SEO will be positively related to the fraction of investors paying attention to the announcement and that there will be a post-announcement stock-return drift that is negatively related to investor attention. In the second part of the paper, we test the above predictions using the media coverage of firms announcing SEOs as our main proxy for investor attention, and find evidence consistent with the above predictions. In the third part of the paper, we develop and test various hypotheses relating investor attention paid to an issuing firm to various SEO characteristics. We empirically show that institutional investor participation in SEOs, the post-SEO equity market valuation of firms, SEO underpricing, and SEO valuation are all positively related to investor attention. Lastly, we also use the number of SEC EDGAR file downloads as an alternative proxy for investor attention, and our findings are robust to this alternative investor attention measure. The results of our identification tests show that the above results are causal.

International Vs Domestic Credit Rating Agencies and the Role of State Owned Enterprises

We investigate the foreign and domestic credit ratings on Chinese seasoned equity offerings (SEOs). Our results indicate a negative association between acquiring credit ratings and SEO underpricing. Ratings from the international agent Moody’s and multiple ratings contribute more to reducing market uncertainty and underpricing than local rating agencies. This finding is attributed to the intense competition in the Chinese market, which exacerbates the conflicts of interest between local rating agencies and rated firms. The negative association disappears in state-owned enterprises (SOEs), in firms with political connections, and for issuers located in the specific economic development areas.

SEO Underpricing and PCAOB Inspection Reports: Do Investors Use PCAOB Inspection Information?

We examine the association between Public Company Accounting Oversight Board (PCAOB) inspection reports and a firm’s cost of equity capital, measured using seasoned equity offering (SEO) discounting. SEO discounting occurs when the offer price is lower than the prior day’s market price of the firm’s shares and represents ‘money left on the table’ for issuing firms. SEO discounting is a non-trivial cost to an issuing firm, and its occurrence is increasing in both frequency and magnitude. We document an economically significant, positive association between SEO discounting and the use of an auditor found to be deficient by the PCAOB, and this association is most pronounced for clients of smaller, triennially inspected auditors for which few other signals of quality exist. Cross-sectional evidence suggests that, for clients of triennially inspected auditors, this relation is stronger for timelier inspection reports and smaller auditing firms. In conclusion, our evidence is consistent with PCAOB inspections providing meaningful information about audit quality to market participants, particularly for clients of smaller, triennially inspected auditors.

The Effect of Industry-Specialist Auditors on SEO Underpricing Before and After the Global Financial Crisis

SUMMARYThis study examines whether auditors' industry expertise is negatively associated with underpricing of seasoned equity offerings (SEO) and whether the association between auditors' industry expertise and SEO underpricing changes around the global financial crisis (GFC). Using a sample of 2,028 SEO observations from 2001 to 2013, we document that in the pre-GFC period, auditors' industry expertise is negatively associated with SEO underpricing, but not during the post-GFC period. Industry-specialist auditors are also associated with higher earnings response coefficients in the pre-GFC period, but not in the post-GFC period. These results suggest that the GFC affected investor confidence in industry-specialist auditors in the capital markets.JEL Classifications: G01; G14; M42.

Industry Specialist Auditors, SEO Underpricing, and the Global Financial Crisis

This study examines whether auditors’ industry expertise is negatively associated with underpricing of seasoned equity offerings (SEO) and whether the association between auditors’ industry expertise and SEO underpricing changes around the global financial crisis (GFC). Using a sample of 2,028 SEO observations from 2001 to 2013, we document that in the pre-GFC period, auditors’ industry expertise is negatively associated with SEO underpricing, but not during the post-GFC period. Industry specialist auditors are also associated with higher earnings response coefficients in the pre-GFC period, but not in the post-GFC period. These results suggest that the GFC reduced investor confidence in industry specialist auditors in the capital markets.

How international competitiveness moderates the relationship between corporate governance and seasoned equity offering underpricing

When a company exhibits favorable management performance, investors may have higher intention to purchase its stock at a premium price; the company may also make more desirable decisions in international expansion, attain higher international competitiveness, win the preference of investors, and thus exhibit a higher stock price, which results in higher seasoned equity offering (SEO) underpricing. Therefore, international competitiveness possibly plays a crucial moderating role between corporate governance and SEO underpricing. The empirical results of this study show that compared with government-controlled companies, international competitiveness strengthens the relationship of SEO underpricing with one-family-controlled companies, two-or-more family-controlled companies, and manager-controlled companies. Accordingly, companies should improve their international competitiveness and conduct favorable corporate management to elicit the investment intention of market participants worldwide.

The Effects of Covenant Violations on the Underpricing of Seasoned Equity Offerings and the Implied Cost of Equity Capital

This study examines the impact of covenant violations on the implied cost of equity capital and the underpricing of seasoned equity offerings (SEOs). Using a novel dataset of 1,028 first-time covenant violations from 1996–2011, we find a higher level of SEO underpricing during the period immediately following covenant violations. This suggests that creditors require violating firms to issue equity to lower leverage and that equity investors interpret the violation negatively. We also find that violating firms experience an average increase of 8.48% in the implied cost of equity capital. By comparing analysts’ earnings forecasts before and after the violations, we conclude that the negative effects on equity owe to the loss of flexibility that accompanies covenant violations, and are not simply a reflection of the deteriorating health of the firm.

Estimating the Model for Seasoned Equity Offering Underpricing: Application to the Chinese Financial Market

ABSTRACTWe estimate the binomial probit model to examine the significance of important explanatory variables documented in seasoned equity offering (SEO) underpricing literature using two statistical approaches: maximum likelihood estimation and Bayesian estimation. In particular, our estimation relies on SEO-related data in the Chinese financial market, where the pricing mechanism is less transparent compared to that in the U.S. market. We find that the signs of coefficients for the explanatory variables in each model are not different, but their magnitudes appear to be different. Our finding also shows that estimation results are generally consistent with the results observed in the U.S. market.

The Role of Internal Control in the Equity Issue Market: Evidence From Seasoned Equity Offerings

This article examines the role of internal control requirements under the Sarbanes–Oxley (SOX) Act of 2002 in firms’ cost of raising equity capital. We find that, prior to the disclosure of internal control weaknesses (ICWs), ICWs are not directly associated with underwriters’ gross spread and seasoned equity offering (SEO) underpricing. After the disclosure, however, underwriters charge a risk premium on ICW issuers, especially on those disclosing ICWs in multiple consecutive years. We also find that SEO underpricing is exacerbated by multiple-year-disclosed ICWs but not by first-timers. More notably, we find that managers play a dominant role in deciding issue size pre-disclosure, but this dominance weakens post-disclosure. Taken together, our evidence suggests that internal controls help moderate the cost of raising equity capital and that ICW disclosures have significant implications for underwriters in the equity issue market.

A comprehensive study of liquidity before and after SEOs and SEO underpricing

We comprehensively study various measures of stock trading liquidity around seasoned equity offerings (SEOs) and SEO underpricing using a sample of 3,811 SEOs, made from 1997 to 2012, and a matched non-SEO sample. We find that all liquidity measures of SEO firms improve significantly after SEO events. Furthermore, the magnitudes of reductions in transaction cost measures of illiquidity are significantly associated with relative offer size, the change in stock price, and the change in volatility with expected signs. Most importantly, a smaller magnitude of SEO underpricing is significantly and positively associated with a larger reduction in transaction cost measures of illiquidity.

The role of lending-relationship banks in the underwriting of seasoned equity offerings: Conflict of interest or certification?

Sections 20 and 32 of the 1933 Glass–Steagall Act address a potential conflict of interest by banning commercial banks from the market for corporate securities underwriting. This restriction was officially rescinded in 1999 by the Gramm–Leach–Bliley Financial Modernization Act. In turn, this development has piqued the interest of scholars and renewed the debate on the role that commercial banks play, as well as the consequences of this role in equity offerings, which may either result in conflict of interest or certification. In this study, we comprehensively examine whether conflict of interest or certification more accurately characterizes the underwriting of seasoned equity offerings (SEOs) by lending-relationship banks. Overall, the results suggest that the presence of lending-relationship banks lowers the gross spreads and underpricing of SEOs. Furthermore, our evidence shows that SEOs led by lending-relationship banks exhibit better long-run performance than other SEOs, which supports the certification hypothesis.

Equity issue-specific versus broad regulatory protections against expropriation risk: International evidence from SEOs

We compare non-issue specific (broad) investor protections against expropriation by firm's insiders with regulations that specifically protect investors of new equity issues (issue-specific). Since in-nation regulations rarely change and are homogenous for all firms, it is difficult to compare issue- and non-issue-specific investor protection mechanisms in country-specific studies. We utilize cross-country differences in regulations to study the relative importance of issue-specific and broad regulatory protections. Using data on seasoned equity offerings (SEO), we find that SEO underpricing is related to broad protections. In particular, SEO underpricing is negatively (positively) related with the strength of ex-post (ex-ante) anti-self-dealing laws. Independent of broad protections, SEO underpricing is unaffected by issue-specific investor protections, that is, neither by disclosure requirements imposed on equity issuers nor by equity issue-specific liability rights conferred on investors. Interactions between broad protections and issue-specific protections indicate issue-specific protections reduce SEO underpricing only in countries with strong broad protections.

SEO underpricing in China's stock market: a stochastic frontier approach

This article studies a sample of 225 Chinese A-share Seasoned Equity Offerings (SEOs) from 1999 to 2007. We compare a novel underpricing measure with a Stochastic Frontier Approach (SFA) as in Koop and Li (2001) to the conventional measure based on the difference between primary market price and secondary market price. We find that SEO underpricing exists in China's stock market, but there is a vast discrepancy between the magnitudes under the two different measures. Also, our empirical results show that the main determinants of the underpricing are associated with high asymmetric information among underwriters, issuers and investors, which is unsurprisingly pronounced in emerging markets such as that of China.

Does having a credit rating leave less money on the table when raising capital? A study of credit ratings and seasoned equity offerings in China

We examine the impact of unsolicited credit ratings on seasoned equity offering (SEO) underpricing in China using issuer credit rating data of listed companies on the Shanghai and Shenzhen Stock Exchanges for the period 2002 to 2009. Our findings suggest that, after controlling for other factors, a SEO firm in China with a credit rating is able to reduce its SEO underpricing, on average, by 11.89% to 14.33%. In addition, we find that the underpricing of an SEO firm that receives a speculative-grade credit rating is not significantly different from an SEO firm with an investment-grade rating. Thus, SEO firms appear to benefit from receiving an unsolicited rating. In general, credit ratings reduce information asymmetry and hence leave less money on the table when raising capital. This may lead firms to actively solicit credit ratings in the future, especially those who plan to access the capital markets.

Earnings smoothing and the underpricing of seasoned equity offerings

PurposeThe purpose of this paper is to examine the impact of earnings smoothing on the underpricing of seasoned equity offerings (SEOs). It aims to investigate whether earnings smoothing can add value to firms by reducing the degree of SEO underpricing.Design/methodology/approachThe sample of US common stock seasoned equity offerings (SEOs) by non‐regulated firms during 1989‐2009 was used to conduct various cross‐section, univariate, and multivariate tests, using several proxies for earnings smoothing, in order to confirm the impact of earnings smoothing on the degree of SEO underpricing. Three‐stage least square estimation was used to address the possible endogeneity of pricing and earnings smoothing.FindingsSmooth earnings performance resulting from discretionary accruals is negatively related to SEO underpricing and improves earnings informativeness. Consistent with risk management and signaling theories, managers' efforts to produce smooth earning reports may add value to their firms. Based on the mean values for SEOs, such smoothing reduces underpricing by $0.33 per share offered and increases the value of the average offering by $1.65 million. Smoothed earnings also conveys information about the firms' future performance, as firms with a long historical pattern of smooth earnings prior to SEOs significantly outperform, for at least three years after the SEO, those with more volatile earnings, with respect to stock returns and operating performance.Originality/valueThe paper contributes specifically to the current literature on earnings smoothing by demonstrating that high quality firms that expect larger quantity of cash flows in the near future are more likely to actively smooth earnings via discretionary accruals before SEOs to reduce underpricing. The paper contributes generally by showing that firms can signal their quality to outside investors by showing smooth earnings over a long period of time and such firms are more likely to experience a lower degree of underpricing through SEO episodes.

Order Imbalances Around Seasoned Equity Offerings

Using market microstructure data, we study the determinants of the buying/selling pattern around seasoned equity offerings (SEOs) and their effect on underpricing. We find that the trading pattern around SEOs is slightly positive before the issue date and heavily negative after the SEO, and this pattern is distinctly different from what has been inferred from stock returns. The large negative order imbalances mostly occurred during the late 90s in NASDAQ market, where 86% of underwriters are also market makers and market depth is shallow. The abnormal order imbalances appear to be the result of underwriter market making activities. We also find that SEO underpricing is correlated with the post-issue-date negative order imbalances. The selling pressure on stock returns is estimated as 20% of SEO underpricing, indicating a significant portion of SEO underpricing is related to market making risk.

The choice between bookbuilding and fixed-price offering: Evidence from SEOs in Taiwan

As bookbuilding is less costly in terms of underpricing and has become the dominant underwriting method in initial public offerings (IPOs) (see Sherman, 2005), we examine whether the pattern still holds in seasoned equity offerings (SEOs) and find that only 15% (93 out of 610 sample firms) of SEO issuers in Taiwan selected the bookbuilding method. Among the fixed-price offerings, 84% of issuers would have had lower total issue costs in terms of the sum of gross spread and SEO underpricing, if the bookbuilding procedure was selected instead. It raises a question: Why do most SEO issuers in Taiwan prefer the costly fixed-price offer to the bookbuilding offer? Extending Barry (1989), we propose a measure of wealth loss to the existing shareholders to analyze this question. After considering the effect resulting from the pre-emption rights held by the existing shareholders, we find that the average wealth loss of fixed-price offerings is less than that of the bookbuilding offerings. That is, most SEO issuers are rational in choosing between the two underwriting mechanisms based on the expected wealth loss.

What Drives Returns and Underpricing of Seasoned Equity Offerings in Taiwan?

We use over 200 firms in Taiwan to examine two issues: (1) how investors in Taiwan react to seasoned equity offerings (SEOs) when firms plan to make capital investments, and (2) factors driving the underwriting price of the stock offerings. Our results indicate that investors seem to have strong negative reactions to the SEOs announcement; they prefer alternative financings for firms with good profitability when they make capital investments. Several interesting results related to underpricing of SEOs are noted. First, larger firms and larger underwriters appear to have more underpricing. The number of underwriters will have a net positive effect on underpricing. Finally, the brokerage firm in comparing to the bank as the underwriter would yield a net positive effect on the underwriting price.

Management Guidance and the Underpricing of Seasoned Equity Offerings

We argue that management guidance on firms’ future earnings and other financial information serves to alleviate information asymmetry around seasoned equity offerings (SEOs), thus reducing the magnitude of SEO underpricing. Controlling for its endogeneity, we find that management guidance reduces the magnitude of SEO underpricing, especially for smaller firms. Further, the effect of guidance on SEO underpricing is driven by firms issuing guidance that is more accurate or more precise. We contribute to the extant literature on both SEOs and voluntary disclosure by providing evidence that voluntary disclosure reduces the magnitude of SEO underpricing and that this effect varies with disclosure quality.