1 Introduction 1
2 The security offering process 4
2.1 U.S. Securities Regulations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
2.2 Alternative flotation methods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
2.2.1 The firm commitment underwriting process . . . . . . . . . . . . . . . . . . . 10
2.2.2 Other major flotation methods . . . . . . . . . . . . . . . . . . . . . . . . . . 15
2.3 Aggregate issuance activity, U.S. 1980-2003 . . . . . . . . . . . . . . . . . . . . . . . 17
2.3.1 Offering frequencies and cash proceeds . . . . . . . . . . . . . . . . . . . . . . 17
2.3.2 Time from IPO to follow-on offerings . . . . . . . . . . . . . . . . . . . . . . . 19
3 Flotation costs 22
3.1 Total flotation costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
3.2 Underwriter compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
3.3 Underpricing of SEOs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
3.4 Dependence between underpricing and underwriter spreads . . . . . . . . . . . . . . 37
3.5 Offering delays and withdrawals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
3.6 Underwriter competition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
3.7 Rights and standby offerings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
3.8 Shelf registered offerings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
3.9 Over-allotment options, warrants and other direct expenses . . . . . . . . . . . . . . 44
3.10 Market microstructure effects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
3.11 Miscellaneous offerings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
3.11.1 Global offerings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
3.11.2 Convertible securities and warrants issuance . . . . . . . . . . . . . . . . . . . 52
3.11.3 Private placements of equity and convertibles . . . . . . . . . . . . . . . . . . 53
3.11.4 Unit offerings in IPOs and SEOs . . . . . . . . . . . . . . . . . . . . . . . . . 56
3.12 Conflicts of interest in the security offering process . . . . . . . . . . . . . . . . . . . 56
4 The flotation method choice 58
4.1 The paradoxical decline in the use of rights . . . . . . . . . . . . . . . . . . . . . . . 59
4.2 Adverse selection and current shareholder takeup . . . . . . . . . . . . . . . . . . . . 60
4.3 Predicting the market reaction to issue announcements . . . . . . . . . . . . . . . . . 65
4.3.1 Models with a single flotation method . . . . . . . . . . . . . . . . . . . . . . 65
4.3.2 Modelling the flotation method choice . . . . . . . . . . . . . . . . . . . . . . 68
4.4 Evidence on issue announcement returns . . . . . . . . . . . . . . . . . . . . . . . . . 70
4.4.1 Market reaction to SEOs in the U.S. . . . . . . . . . . . . . . . . . . . . . . . 71
4.4.2 Market reaction to SEOs internationally . . . . . . . . . . . . . . . . . . . . . 73
4.4.3 Market reaction to corporate debt offerings . . . . . . . . . . . . . . . . . . . 76
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4.5 Implications of the announcement-return evidence . . . . . . . . . . . . . . . . . . . 78
4.6 Signaling and the rights offer discount . . . . . . . . . . . . . . . . . . . . . . . . . . 82
5 Security offerings and market timing 84
5.1 Timing theories with rational market pricing . . . . . . . . . . . . . . . . . . . . . . 85
5.1.1 Adverse selection and the business cycle . . . . . . . . . . . . . . . . . . . . . 86
5.1.2 Optimal investments and equity offerings . . . . . . . . . . . . . . . . . . . . 90
5.1.3 Pseudo market timing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92
5.2 Timing theories with non-rational market pricing . . . . . . . . . . . . . . . . . . . . 93
5.2.1 Timing of firm-specific returns . . . . . . . . . . . . . . . . . . . . . . . . . . 93
5.2.2 Timing the market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94
5.3 Evidence on long-run post-issue stock returns . . . . . . . . . . . . . . . . . . . . . . 96
5.3.1 Sample selection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97
5.3.2 Cumulative buy-and-hold returns for issuers versus matched firms . . . . . . 99
5.3.3 Average monthly abnormal returns using factor pricing regressions . . . . . . 102
5.4 Robustness issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105
5.4.1 Alternative and omitted risk factors . . . . . . . . . . . . . . . . . . . . . . . 105
5.4.2 Time-varying factor loadings . . . . . . . . . . . . . . . . . . . . . . . . . . . 107
5.4.3 Issue-purged factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 109
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