The Effect of Demand for Shares on the Timing and Underpricing of Seasoned Equity Offers
Southern Illinois University at Carbondale
Southern Illinois University at Edwardsville
Kathleen M. Kahle
University of Arizona - Department of Finance
February 18, 2013
Financial Management, Forthcoming
Despite high levels of asymmetry of information, firms that issue SEOs within a year of their IPO (follow-on SEOs) are able to offer shares at a lower discount compared to more mature firms. We provide evidence that this seeming contradiction can be explained by a very high degree of demand for the follow-on offering. We find that the likelihood of issuing a follow-on SEO is significantly related to the level of institutional demand and that discounts are lower for follow-on SEOs in which institutional demand is high. We also consider the joint effect of cash holdings and follow-on SEOs on discounts, since firms that have recently gone public tend to hold high levels of cash. Underpricing is higher for firms with elevated pre-offer levels of cash, which is consistent with market timing predictions. However, this relation is mitigated for both follow-on SEOs and issues that also have high share demand.
Number of Pages in PDF File: 45
Keywords: seasoned equity offerings, initial public offerings, underpricing, offer discounts, float, institutional demand
JEL Classification: G14, G24, G32Accepted Paper Series
Date posted: August 25, 2011 ; Last revised: February 20, 2013
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