The pricing of equity offerings (original) (raw)
Related papers
International Review of Finance, 2005
In this study, we employ order imbalance measures to provide evidence that there exists an individual/institutional dichotomy in reactions to seasoned equity offerings (SEOs). The evidence supports the notion that small, possibly naive, individual investors keep trading SEO stocks aggressively while the returns of these stocks reverse in the post-issue period. Investors appear to be tardy in adjusting their overoptimism, and their trades systematically lag the return response. It appears to take more than two years for small individual investors to adequately revise their overoptimistic views. Consequently, the SEO portfolios that individual investors buy on net strongly underperform relative to the size-matching nonissuer portfolios as well as to the SEO portfolios that institutional investors buy on net in the post-issue period.
Aftermarket support and underpricing of initial public offerings
Journal of Financial Economics, 1994
We study the aftermarket for 72 initial public offerings (IPOs) using comprehensive trade and quote-change data from every market maker for the first three days of trading. Underwriters quote higher bid prices than other market makers for issues that commence trading at or below the offer price. Underwriters repurchase large quantities of stock in the aftermarket without risk by overselling the issue by the amount of the overallotment option. If the IPO is hot, the overallotment option is exercised. If not, the short position is covered with aftermarket selling. We discuss several reasons for underwriter support. . Clifford Smith (the editor) refer-ee) provided suggestions that greatly improved the focus and clarity of the paper. Jeffrey Harris has provided excellent research assistance. Support of the ice Center at io State University (Schultz) and the University of Iowa (Zaman) is gratefully acknowledged.
Windows of opportunity and seasoned equity offerings: An empirical study
Cogent Economics & Finance , 2018
Taking a sample of seasoned equity offerings (SEOs) by firms listed on Bombay Stock Exchange (BSE) from the year 1992 to 2012, we examine two of the key issues concerning SEOs. First, whether SEOs are underpriced, issued at a price lower than the prevailing market price; and second, whether companies time their issues. Study of 162 SEOs exhibits significant underpricing at 1% significance level leading us to conclude that SEOs in India are significantly underpriced. Analysis of abnormal returns for 114 SEOs taking different event windows surrounding issue opening dates reveals that, except for the −1 to + 1 event window, CAAR for all other event windows are significantly negative. This leads us to conclude that investors in India experience significantly negative abnormal returns surrounding SEO issue opening. Overall, findings of the study reveal that SEOs in India are underpriced and that there exist windows of opportunity for SEOs in India.
Discounting and underpricing in seasoned equity offers
Journal of Financial Economics, 2003
Discounting and underpricing spread across most seasoned equity offers in the 1990s and were four to five times higher than in earlier years-particularly for riskier and more difficult to market offers, which were more prevalent. Analyses suggest that expected discounting is a cost of uncertainty about firm value, marketing new shares, and acquiring information that raises the offer price. Stockholders appear to recognize this as they incorporate predictable discounting in stock prices when equity offers are first announced. The surprise component of discounting, which reflects the lead bank's final adjustment to the offer price after the close of trading the night before the offer, releases information that often causes economically large swings in firm value on the offer day. The evidence points to disparities between the issuer's closing price and the price suggested in the lead bank's final order book as a primary source of information. The discount surprise appears to be an effective mechanism used by lead banks to update capital suppliers with that eleventh hour information before they commit their funds.
Initial public offerings of equity securities
Journal of Financial Economics, 1992
In contrast with numerous studies that find significant underpricing for initial public offerings of industrial firms, we document a statistically significant average return of-2.82% on the first trading day for a sample of 87 initial public offerings of real estate investment trusts during the 1971-1988 period. Qur overpricing result is invariant to offer price, issue size, distribution method, offer period, and underwriter reputation. Newly issued REITs, on average, substantially underperfoml a matching sample of seasoned REITs during the first 190 trading days. Interestingly, buyers of overpriced REITs are predominantly individual or non-13(f) institutional investors.
The marketing of seasoned equity offerings☆
Journal of Financial Economics, 2010
In an accelerated seasoned equity offering (SEO), an issuer foregoes the investment bank's marketing efforts in return for a lower fee. To explain why many issuing firms choose a higher cost fully marketed offer, we posit that the marketing effort flattens the issuer's short-run demand curve. Alternatively stated, with a fully marketed offer, the issuer is paying investment bankers to create demand, making the elasticity of demand at the time of issuance an endogenous choice variable. Empirical analysis shows that both the pre-issue elasticity of the issuing firm's demand curve and the offer size are important determinants of the offer method choice. We find evidence of a large transitory increase in the elasticity of demand for issuers conducting fully marketed SEOs.
Offering methods and issuer-oriented underpricing costs: Evidence from the Hong Kong IPO market
Journal of International Financial Markets, Institutions and Money, 2009
Keywords: Hong Kong initial public offerings Offering methods Issuer underpricing cost Interest on application funds a b s t r a c t We extend study by relating the estimation of the issuer-oriented underpricing costs to the IPO offering methods. We distinguish between the oversubscription rates of institutional and retail investors in the estimation of the issueroriented underpricing costs associated with the pure fixed price, fixed price and bookbuilding IPOs. Leung and Menyah show that the issuer underpricing cost of new share issues (U N ) averages about 14% of the headline underpricing. This average drops to about 7% after accounting for the interest income from application funds (R AF ). In this study, we show that the mean of U N is about 16% (11%) of the headline underpricing before (after) accounting for the R AF . We report also evidence that the U N and the R AF depend on the IPO offering method. The U N of the pure fixed price, fixed price and bookbuilding IPOs represent 15.60%, 4.61% and 18.07% of the headline underpricing, respectively. These averages fall to 12.54%, −4.17% and 16.67% after accounting for the R AF . Our conclusions are robust across different time periods.
Seasoned equity offerings by all-equity firms
International Review of Economics & Finance, 1996
Previous studies on the announcement effect of seasoned equity offerings document an average two-day common stock abnormal return of approximately-3%. The overall results from these studies suggest that capital structure hypothesis, information hypothesis, and/or price-pressure hypothesis offers a potential explanation for the abnormal reaction around the announcement date. This paper controls for capital structure related effects by examining the announcement effect of seasoned equity offerings made by all-equity firms. Our results show that the average two-day common stock abnormal return is-0.82% (significant at 5% level). This result suggests that capital structure related effects constitute a major portion of the announcement effect of seasoned equity offerings studied in the previous literature. Furthermore, the negative abnormal returns following equity issues cannot be attributed entirely to capital structure related effects. Our cross-sectional tests indicate that the information hypothesis is significant in explaining the abnormal reaction. While our results do not support the price-pressure hypothesis, we find that the negative reaction around the announcement date is significantly mitigated if a firm has issued stock more frequently during our sample period.
The Effect of Investor Attention on the Pricing of Seasoned Equity Offerings
SSRN Electronic Journal, 2015
I investigate the role of investor attention on seasoned equity offerings' (SEOs) outcomes. I use an archive of Thomson Reuters' news articles and third-party newswires to proxy for investor attention. I find that the volumes of news articles prior to the offerings are positively associated with the offer price discounts of SEOs. Furthermore, the volumes of news articles are negatively associated with the cumulative abnormal returns three days around the SEOs. I conclude that the costs of equity increase with the frequency of news stories prior to SEOs. Overall, the evidence is consistent with the hypothesis that investor attention contributes to the efficiency of the stock market and affects investors' information processing in SEOs.