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Security Offerings


B. Espen Eckbo


Dartmouth College - Tuck School of Business; European Corporate Governance Institute (ECGI)

Ronald W. Masulis


University of New South Wales - Australian School of Business; European Corporate Governance Institute (ECGI); Financial Research Network (FIRN)

Oyvind Norli


BI Norwegian Business School - Department of Financial Economics


HANDBOOK OF CORPORATE FINANCE: EMPIRICAL CORPORATE FINANCE, Vol. 1, B. E. Eckbo, ed., Chapter 6, pp. 233-373, Elsevier/North-Holland Handbook of Finance Series, 2007
Tuck School of Business Working Paper No. 2005-28

Abstract:     
This essay surveys the extant literature and adds to the empirical evidence on issuance activity,flotation costs, and valuation effects of security offerings. We focus primarily on public offerings of equity for cash, although we also review and present new evidence on debt offerings and private placements. The essay has four major parts: (1) We review aggregate issue activity in exchange listed securities from 1980 through 2004. Following the IPO, only about one-half of the publicly traded firms undertake a public security offering of any type, and only about one-quarter undertake a SEO. Thus, SEOs are relatively rare, which is consistent with adverse selection costs being an important consideration when raising cash externally. (2) We review the evidence on direct issue costs across security types and flotation methods, including the more recent SEO underpricing phenomenon. A large number of studies provide evidence on the determinants of underwriter compensation, and confirm the importance of variables capturing information asymmetries and underwriter competition. (3) We survey and interpret the valuation effects of security issue announcements. In the period since the Eckbo and Masulis (1995) survey, many studies examining announcement-period stock returns have focused on the effects of flotation method choice and foreign offerings. The well-known negative average announcement effect observed for U.S. SEOs appears to be a somewhat U.S.-specific phenomenon. (4) We review and extend evidence on the performance of issuing firms in the five year post-issue period. The literature proposes either a risk based-explanation or a behavioral explanation for the phenomenon of low average realized returns following IPOs and SEOs. Standard factor model regressions fail to reject the null that the low average returns are commensurate with issuers' risk exposures. Recent theoretical developments suggest that lower risk levels following equity issues may be linked to issuers' investment activity, a promising direction for future research.

Number of Pages in PDF File: 168

Keywords: Security offering, IPO, SEO, debt offer, flotation method, underwriting, rights offer, private placement, shelf registration, adverse selection, announcement returns, long run performance

JEL Classification: G21, G24, G32

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Date posted: December 6, 2005 ; Last revised: May 3, 2009

Suggested Citation

Eckbo, B. Espen and Masulis, Ronald W. and Norli, Oyvind, Security Offerings. HANDBOOK OF CORPORATE FINANCE: EMPIRICAL CORPORATE FINANCE, Vol. 1, B. E. Eckbo, ed., Chapter 6, pp. 233-373, Elsevier/North-Holland Handbook of Finance Series, 2007; Tuck School of Business Working Paper No. 2005-28. Available at SSRN: http://ssrn.com/abstract=863664

Contact Information

B. Espen Eckbo (Contact Author)
Dartmouth College - Tuck School of Business ( email )
Hanover, NH 03755
United States
603-646-3953 (Phone)
603-646-3805 (Fax)
HOME PAGE: http://www.tuck.dartmouth.edu/eckbo
European Corporate Governance Institute (ECGI)
c/o ECARES ULB CP 114
B-1050 Brussels
Belgium
Ronald W. Masulis
University of New South Wales - Australian School of Business ( email )
Sydney, NSW 2052
Australia
612-9385-5860 (Phone)
612-9385-6347 (Fax)

European Corporate Governance Institute (ECGI) ( email )
c/o ECARES ULB CP 114
B-1050 Brussels
Belgium
Financial Research Network (FIRN)
C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia
HOME PAGE: http://www.firn.org.au

Oyvind Norli
BI Norwegian Business School - Department of Financial Economics ( email )
Nydalsveien 37
Oslo, N-0442
Norway
+4746410514 (Phone)
HOME PAGE: http://www.bi.edu/research/employees/?ansattid=a0510249
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