Accounting Comparability and Underpricing Seasoned Equity Offerings
50 Pages Posted: 30 Dec 2013 Last revised: 12 Apr 2024
Date Written: April 10, 2024
Abstract
This paper provides evidence that accounting comparability significantly mitigates underpricing of seasoned equity offerings (SEOs), where underpricing is the discount from the prevailing market price offered by underwriters to increase the probability of full subscription at the initial offer price. To measure accounting comparability, we follow the procedure in De Franco, Kothari, and Verdi (2011), with a modification in the way we select the SEO firm’s peers. We identify the SEO firm’s six closest peers with reference to the firms’ 10-K report descriptions of their business operations. This innovation adds construct validity to the accounting comparability measure, as it relates to a peer group of firms more like the ones an underwriter might select in determining the offer price. With controls for information asymmetry and valuation uncertainty, as proxied by accruals quality and return volatility, respectively, our results indicate that underpricing declines with increasing accounting comparability. Cross-sectional tests suggest that stronger accounting comparability offers underwriters and investors a tool that cuts through the fog associated with poor accruals quality and high return variability, thereby mitigating their underpricing effects. We also find that the benefit of accounting comparability in mitigating underpricing increases with the scarcity of institutional investor interest in the SEO firm’s stock. Overall, our results suggest that accounting comparability plays a powerful role in mitigating underpricing in foggy information environments. This role contradicts the role implied by the FASB (2010) and IASB (2021) conceptual frameworks which suggest that the efficacy of accounting comparability in facilitating investor decisions depends on having higher levels of accruals quality.
Keywords: Seasoned equity offerings; Financial Statement Comparability; Valuation; Information asymmetry; Decision usefulness; Capital markets; Underpricing; Cost of capital
JEL Classification: M41, G14, G24, G32
Suggested Citation: Suggested Citation