Seasoned Equity Offerings A Survey

Electroniccopyavailableat:=1299872SeasonedEquityOfferings:ASurvey1B.EspenEckboTuckSchoolofBusinessatDartmouthHanover,[e-mail]lofManagementVanderbiltUniversityNashville,Tennessee37203PublishedinR.Jarrow,V.MaksimovicandB.Ziemba(eds.)Finance(North-Holland,SeriesofHandbooksinOperationsResearchandManagementScience),1017-1072,1995.1ToappearinJarrow,R.,V.MaksimovicandW.T.Ziemba(eds.),Finance(North-Holland,SeriesofHandbooksinOperationsResearchandManagementScience),1994.Weappreciatethecommentsofthereferee,RexThompson.Electroniccopyavailableat:=1299872Contents1Introduction22Trendsinaggregatecorporatefinancingactivity32.1Debtvs.equity.......................................32.2Publicsecurityofferingsforcash.............................52.3Internationaltrends....................................63Flotationmethodsandcosts73.1Frequencyofmajorflotationmethods..........................73.2Directflotationcosts....................................123.3Additionalcostsofrights.................................164ValuationeffectsofSPOannouncements194.1Summaryofevidence....................................194.2Optimalcapitalstructureeffects.............................234.3Asymmetricinformationandcashfloweffects......................234.4Adverseselectioneffects..................................254.5Effectsofchangesinownershipstructure.........................274.6Effectsofpartialanticipation...............................285Thechoiceofequityflotationmethod295.1Rightsvs.underwrittenoffers...............................295.2Besteffortvs.firmcommitmentunderwritingcontracts................346ThetimingofSPOs357Marketmicrostructureeffects398Conclusions4111IntroductionCorporatesecuritiesareissuedthroughawidevarietyofmethods,ofteninvolvingcomplexcontractualarrangements.Whilewedonotyethaveaunifiedtheoryofthecapitalacquisitionprocess,ourunderstandingofthesecontractualarrangementsandtheirimpactonfirmvaluehasprogressedsubstantiallyoverthepastdecade.Inthispaper,wereviewthetheoryandstatisticalevidenceconcerningthecausesandeffectsofseasonedpublicoffers(SPOs)ofcommonstock,1withparticularemphasisonresultsandfindingsthatpost-datethewellknownsurveybySmith(1986).Infact,recentstudiesnowprovideatleastpartialanswerstoseveralofthe“unresolvedissues”listedbySmithattheendofhissurvey.Theseinclude(i)towhatextentdoesthemarketreactiontoissueannouncementsdependontheflotationmethod;(ii)theconditionsthatleadissuerstoselectuninsuredrightsorrightswithstandbyunderwritingoverafirmcommitmentunderwrittenoffer;(iii)whyrightsissuescontinuetobethepredominantflotationmethodinmanyforeignjurisdictionswhiletheyhavebecomevirtuallyextinctintheU.S.;and(iv)thedeterminantsofdirectandindirectflotationcostsacrossflotationmethods.Inaddition,wereview(v)recenttrendsinaggregateissueactivity;(vi)thetimingofindividualequityissues;and(vii)marketmicrostructureeffectsofequityoffers.Webegininsection2byshowingtrendsinaggregateissueactivityacrosscommonstock,preferredstock,andcorporatebondsintheU.S.overthelast50years.Thisservestoplacetherelativeimportanceofseasonedcommonstockissuesinitsproperhistoricalperspective.Section2alsocomparesrecenttrendsinequityissueactivityintheU.S.withthatofCanada,EuropeandJapan.Section3describesthemostfrequentlyusedflotationmethodsandshowstheirrelativeaggregatefrequenciesbeginningin1935.Section3thengoesontoexamineavailableevidenceondirectandindirectcostsforthreemajorflotationmethods;uninsuredrights,standbyrightsandfirmcommitmentunderwrittenoffers.Multivariateregressionsstronglyindicatethatrightsissueshavethelowestdirectflotationcost,firmcommitmentunderwrittenoffersthehighest,withstandby1Initialpublicoffers(IPOs)arediscussedinaseparatechapterofthisvolume.2rightsoffersinbetween.Inlightofthis,theoverwhelmingpreferencefortheapparentlyexpensivefirmcommitmentflotationmethodmustreflecteitheradditionalindirectcostswhichdecreasetheattractivenessofrightsandstandbysor,alternatively,amanagerialincentiveprobleminchoosingtheoptimalflotationmethod.Section3discussesanumberofindirectcosts,includingpersonaltaxes,shareholderbornetransactioncostsofsellingrights,costsofrightsofferingfailure,andanti-dilutionclausemandatedwealthtransferstoconvertiblesecurityholderstriggeredbyrightsissues.However,thereisinsufficientevidencetoconcludethattheseindirectcostsexplainthelowfrequencyofrightsintheU.S..Section4discussesthevaluationeffectsofseasonedequityoffersacrossflotationmethods.Themajortheoreticalargumentsarebasedonadverseselectionandsignallingeffectsassociatedwithinformationasymmetries,agencycostsoffreecashflow,wealthtransfersbetweenclassesofsecurityholders,aswellasmoralhazardproblemsinloweringmanagerialstockownership.Wereviewthelargebodyofempiricalevidenceinthisarea,includingstockpriceeffectsofSPOannouncementsbyflotationmethods,typesofsecuritiesissued,andclassifiedbyoffercompletionorwithdrawal.Availableevidenceonnon-publicseasonedequityoffersisalsointegratedintotheanalysisofthissection.Sections5discussesmodelsoftheflotationmethodchoice(rightsvs.under