Institutional ownership and the choice of equity issue method

We examine how institutional ownership, which reflects the informational efficiency of stock prices (Boehmer and Kelley, 2009), impacts the seasoned equity offering (SEO) issue method choice between shelf offerings and traditional SEOs. We find that firms with greater institutional ownership, particularly long term ownership, tend to choose shelf offerings. We control for issue method choice and find that the offer discount decreases with institutional ownership for both shelf and traditional issuers and that higher institutional ownership reduces direct issue costs and is related to a shorter due diligence process for traditional SEOs. This suggests that underwriters are more likely to be able to perform the certification function (and with less effort) for issuers whose stock is priced more efficiently.     

Evidence of Early-Mover Advantages in Underwriting Spreads

I use a sample of 2370 public security offerings, comprising 64 financial security innovations and 4 traditional securities, to examine how investment banks are compensated for bearing underwriting risks related to new product development. I find strong evidence that underwriting fees decline as the innovation is widely adopted and competition enters the market, suggesting that underwriters be compensated for the additional risk associated with innovative securities. The data also reveal that underwriters seek greater compensation for security features that increase price volatility, which is consistent with the notion that underwriters value their position as a put option on the security. Finally, the inverse relationship between underwriting spreads and underwriter prestige suggests that larger, more reputable underwriters experience economies of scale.     

Do the equity holding and soundness of bank underwriters affect issue costs of SEOs?

This paper examines the effects of characteristics of bank underwriters on issue costs in seasoned equity offerings in Japan following deregulation in 1999. I find that banks’ holding loans have a negative effect on price discounts and no effect on underwriting fees. However, banks’ equity holdings have no effect on discount rates and a positive effect on underwriting fees. Furthermore, issuers with unhealthy banks pay higher discount rates, are more likely to be weak in their ex-post operating performance, and are less willing to switch underwriters. I conclude that the characteristics of banks have different effects on issue costs.     

Seasoned Equity Offerings: Stock Market Liquidity and the Rights Offer Paradox

This paper examines the impact of market liquidity on seasoned equity offerings (SEO) characteristics in France. We find that, besides blockholders’ takeup, liquidity is an important determinant of SEO flotation method choice. We document higher direct equity offering flotation costs, but also improved stock market liquidity after public offerings and standby rights relative to uninsured rights. After controlling for endogeneity in the choice of SEO flotation method, we find that pure public offerings and standby rights are comparable in terms of direct costs and liquidity improvement. Our results provide new insights as to why firms choose public offerings despite apparently higher costs.     

Bought deals: The value of underwriter certification in seasoned equity offerings

The bought deal is the predominant method of underwriting SEOs in Canada. Offer prices are set and underwriters commit to purchase offerings several days earlier for bought deals than for firm commitment issues, implying stronger underwriter certification for bought deal issues. Consistent with the certification hypothesis, this study finds a significantly smaller negative stock price reaction around the announcement of bought deals compared to firm commitment issues. Bought deals are further shown to have smaller offer price discounts and smaller underwriting fees, implying superior pricing and thus, higher quality offerings. These findings suggest that investment banks’ underwriting method of choice is informative of issue quality.     

Initial Public Offerings and Underwriter Reputation

This paper examined the returns earned by subscribing to initial public offerings of equity (IPOs). Rock (1986) suggests that IPO returns are required by uninformed investors as compensation for the risk of trading against superior information. We show that IPOs with more informed investor capital require higher returns. The marketing underwriter's reputation reveals the expected level of “informed” activity. Prestigious underwriters are associated with lower risk offerings. With less risk there is less incentive to acquire information and fewer informed investors. Consequently, prestigious underwriters are associated with IPOs that have lower returns.     

Two‐Sided Matching: How Corporate Issuers and Their Underwriters Choose Each Other

In this article, the authors update and confirm the findings of a 2005 article that was the first to view corporate underwriter choices as the outcome of a two‐sided matching process in which issuers look to the abilities of the underwriters offering their services and underwriters focus on the quality of the issuers that wish to use their services. This view offers a contrast with both the conventional representation of issuer‐underwriter associations as one‐sided decisions (by either issuers or underwriters) and the classical economist's representation of a competitive market in which prices serve as the primary market‐clearing mechanism. In their examination of both initial public offerings (IPOs) and seasoned equity offerings (SEOs) during the period 1980–2010, the authors continue to find strong evidence that higher‐quality issuers associate with more reputable underwriters and lower‐quality issuers match with lower reputation underwriters. Moreover, when examining cases of underwriter switching between an IPO and SEOs by the same issuer, they find that cases involving the largest divergence in the relative rankings of issuer and underwriter were the most likely to produce a change of underwriter—and that issuers that experienced larger post‐ IPO increases in quality were more likely to find more reputable underwriters for their SEOs (than for their IPOs). The authors also find that the larger the number of offerings brought to market in a given year, the smaller the market share of the top‐tier underwriters, likely reflecting the willingness of the most reputable underwriters to turn down business to maintain quality and reputation. Finally, the most reputable underwriters appear to benefit from the fact that the issuers whose IPOs they underwrite end up raising larger amounts of capital, both at the time of the IPO and in the larger and more frequent seasoned offerings by such issuers that come after the IPO. This evidence in support of two‐sided matching suggests that, especially for high‐quality issuers, the reputation of the underwriters they contract with for security offerings is likely to be more important than the underwriting fees they incur. What's more, the authors' finding that the most reputable underwriters are less likely to lose high‐quality clients and have more stable market share—and that the higher‐quality issuers they attract end up raising larger amounts of capital over their lives as public companies—suggests that underwriters' investments in building and preserving their reputations have a large expected payoff.     

Relationship-Specific Assets and the Pricing of Underwriter Services

This paper investigates the effect of setup costs on the pricing of investment banking services. The existence of setup costs is predicted to result in lower underwriter spreads in IPOs for firms that are expected to issue again. Consistent with this prediction, I find significantly lower spreads for firms that make subsequent issues. I also find that a firm's likelihood of changing underwriters in a subsequent offer is related to the time between offerings and the underwriter's pricing performance in the IPO. These results suggest that the deviations from optimal IPO pricing carry a penalty for the underwriter.     

The Role of Lockups in Initial Public Offerings

In a sample of 2,794 initial public offerings (IPOs), we testthree potential explanations for the existence of IPO lockups:lockups serve as (i) a signal of firm quality, (ii) a commitmentdevice to alleviate moral hazard problems, or (iii) a mechanismfor underwriters to extract additional compensation from theissuing firm. Our results support the commitment hypothesis.Insiders of firms that are associated with greater potentialfor moral hazard lockup their shares for a longer period oftime. Insiders of firms that have experienced larger excessreturns, are backed by venture capitalists, or go public withhigh-quality underwriters are more likely to be released fromthe lockup restrictions.     

Multiple lead underwriting syndicate and IPO pricing

This paper examines the role of multiple lead underwriters (MLUs) in pricing initial public offerings (IPOs) by considering certification and market power hypotheses. Consistent with the notion that MLUs provide certification to the issue, we find that IPOs backed by MLUs price the offer closer to the intrinsic value of the firm than firms backed by single lead underwriters. Our results also indicate that IPOs led by MLUs experience lower initial return, lower variability of initial returns and better long-run performance. The results are robust to self-selection and omitted variable biases. MLU led offerings also exhibit a lower risk of withdrawal and are more likely to conduct a larger secondary equity offering.     

Stock vs. stock-warrant units: evidence from seasoned offerings

Recent theories based on sequential financing and information signaling reveal a special role for warrants. Data from initial public offerings (IPOs) of stock-warrant units have been used to test the theories, and we extend the analysis to seasoned offerings. Consistent with predictions from both families of theories, we find that issues made by smaller and younger firms are more likely to involve stock-warrant units, and firms with greater stock price volatility are more likely to issue units in seasoned offerings. Moreover, firms with relatively high levels of long-term debt, and those whose issues are underwritten by less prestigious underwriters are more likely to employ stock-warrant unit financing. Consistent with information signaling, we find that firms with high managerial ownership are more likely to issue units. Firms that include warrants in their stock offerings are predicted to have experienced higher abnormal stock returns than if they had issued shares alone. Thus, consistent with both theoretical explanations, some firms can reduce capital costs by adding warrants to shares in seasoned offerings.     

Effect of Underwriter Prestige on the Interest Cost of Municipal Bond Offerings

The authors use tombstones from Investment Dealers' Digest to develop continuous and bracket prestige measures of underwriters in the municipal bond market. The measures are used in multivariate analysis of 409 offerings to examine the relationship between net interest cost to the issuer and prestige of the lead underwriter. Multiple regression analysis reveals that issuers in the sample do not receive statistically significant positive benefits from using prestigious underwriters. The authors note that their results are consistent with segmentation of the market for municipal bonds.     

Rights Offerings and Corporate Financial Condition

Certain American industrial firms still use equity rights offerings. Most of these offerings are uninsured. I examine firms' financing decisions, and develop the explanation that rights offerings are used by firms in financial distress with difficulty accessing underwriting services. These firms have little to lose from the costs of adverse selection that accompany the lack of underwriter certification of uninsured rights offerings. Probit analysis of 660 seasoned NYSE, Amex, and Nasdaq equity issues between 1983–1999 yields results consistent with my explanation. There is no evidence that variables previously linked to rights usage (e.g., ownership concentration) continue to be relevant to the issue method choice.     

Do you really want to ask an underwriter how much money you should leave on the table?

This paper analyses whether the owners of companies seeking to list will leave less money on the table if underwriters are employed to price and market the issue. Our findings indicate that limited liability and Industrial company initial public offerings (IPOs) that have used underwriters have left more money on the table than those not employing underwriters. Not only is there a direct cost in employing an underwriter but this study suggests there might also be an indirect cost. We also find that a positive forecast earnings per share yield may be useful in reducing the amount of money left on the table.     

UNDERWRITER REPUTATION AND REPETITIVE PUBLIC OFFERINGS

A recent examination of underwriter reputation and initial public offerings (IPOs) suggests that one of the reasons prestigious underwriters market low-risk IPOs is to increase the expected present value of subsequent offerings. There is a greater likelihood that a firm issuing low-risk IPOs will be a viable future operation with the potential for subsequent offerings than a firm issuing high-risk IPOs. I examine the hypothesis that the likelihood of subsequent offerings is negatively related to IPO risk. In addition to finding support for this hypothesis, I show that the likelihood of subsequent offerings is positively related to the IPO underwriter's reputation and negatively related to the IPO gross spread. Finally, I find that the likelihood of firms switching IPO underwriters for subsequent offerings decreases with increasing IPO underwriter reputation.     

Underwriter reputation,earnings management and the long‐run performance of initial public offerings

This study contributes to the extant literature on the nature of earnings management surrounding initial public offerings (IPOs) by investigating the role of underwriter reputation. We argue that prestigious underwriters will protect their reputation by carefully monitoring and certifying financial information on IPO firms, thereby limiting any potential earnings manipulation. As a result, those IPO firms that are associated with more prestigious underwriters are likely to exhibit substantially less‐aggressive earnings management. Conversely, we find the existence of a negative relationship between earnings management and the post‐offer performance of an IPO firm’s stocks only for those firms associated with less‐prestigious underwriters.     

Does Prospect Theory Explain IPO Market Behavior?

We derive a behavioral measure of the IPO decision‐maker's satisfaction with the underwriter's performance based on Loughran and Ritter (2002) and assess its ability to explain the decision‐maker's choice among underwriters in subsequent securities offerings. Controlling for other known factors, IPO firms are less likely to switch underwriters when our behavioral measure indicates they were satisfied with the IPO underwriter's performance. Underwriters also extract higher fees for subsequent transactions involving satisfied decision‐makers. Although our tests suggest that the behavioral model has explanatory power, they do not speak directly to whether deviations from expected utility maximization determine patterns in IPO initial returns.     

Intended Use of Proceeds,Underwriter Quality and the Long‐run Performance of SEOs in the UK

We document that prospectus disclosure of (i) the motives for a seasoned equity offering, and (ii) the choice of underwriter explain the long‐run performance of equity issuers in the UK. Firms citing investment needs show no abnormal performance after the offering and have higher investment rates post‐issue compared to the period before the offering. Issuers that state general corporate purposes and recapitalisation motives underperform, have similar investment rates pre‐ and post‐issue, and their leverage tends to increase after the offering. Further, consistent with the certifying role of underwriters, equity issues underwritten by high‐quality brokers show no evidence of post‐issue abnormal returns, but offerings taken public by low‐quality underwriters exhibit negative abnormal performance. Together, our results document the significant role that prospectus information on the intended use of offering proceeds and on the underwriter play in predicting issuers post‐offering performance in the UK.     

Underwriter reputation and underpricing: evidence from the Australian IPO market

Dimovski and Brooks (J Intern Financ Mark Inst Money 14:267–280, 2004b) examined 358 Australian industrial and mining company initial public offerings (IPOs) from 1994 to 1999 to report that more money was left on the table by IPOs that engaged underwriters than those that did not engage underwriters. Loughran and Ritter (Autumn 5–37, 2004) suggested that the negative relation between underwriter reputation and underpricing has reversed in the 1990s with U.S. IPOs. The main purpose of this paper is to study the relationship between underwriter reputation and underpricing in terms of Australian IPO data. In this paper, we use 380 Australian industrial company IPOs from 1994 to 2004 to perform the empirical study. Our results suggest that more prestigious underwriters are associated with a higher level of underpricing. Other variables that are found to be significant in explaining the level of IPO underpricing are market sentiment, share options, total capital raised and underwriter options.     

Global trends in IPO methods: Book building versus auctions with endogenous entry

The U.S. book-building method has become increasingly popular for initial public offerings (IPOs) worldwide over the last decade, whereas sealed-bid IPO auctions have been abandoned in nearly all of the many countries in which they have been tried. I model book building, discriminatory auctions, and uniform price auctions in an environment in which the number of investors and the accuracy of investors’ information are endogenous. Book building lets underwriters manage investor access to shares, allowing them to reduce risk for both issuers and investors and to control spending on information acquisition, thereby limiting either underpricing or aftermarket volatility. Because more control and less risk are beneficial to all issuers, the advantages of book building's allocational flexibility could explain why global patterns of issuer choice are surprisingly consistent. My models also predict that offerings with higher expected underpricing have lower expected aftermarket volatility; that an auction open to large numbers of potential bidders is vulnerable to inaccurate pricing and to fluctuations in the number of bidders; and that both book-built and auctioned IPOs will exhibit partial adjustment to both private and public information.