Seasoned Equity Offers: The Effect of Insider Ownership and Float

Abstract:     
SEO underpricing has increased dramatically since the early 1980s. While previous research has examined the determinants of SEO underpricing, these studies have not explored the effect of insider ownership on discounts. We find that this effect is twofold. First, higher insider ownership reduces float, thereby increasing price pressure and SEO underpricing; this effect is greatest in firms with low liquidity. Second, the greater the percentage of secondary shares offered, the lower the underpricing, suggesting that managers pressure banks to reduce underpricing when their personal wealth is at stake. However, we find that this negative relation is mitigated if the firm employs a prestigious underwriter.

Keywords: seasoned equity offerings, follow-on offerings, underpricing, float, marketing of securities, ownership

JEL Classifications: G14, G24, G32

Working Paper Series