Analyst Coverage and the Cost of Raising Equity Capital: Evidence from Underpricing of Seasoned Equity Offerings

Posted: 23 Oct 2007 Last revised: 5 Mar 2014

See all articles by Robert M. Bowen

Robert M. Bowen

Chapman University - The George L. Argyros School of Business & Economics; University of Washington - Foster School of Business

Xia Chen

Singapore Management University

Qiang Cheng

Singapore Management University

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Abstract

There is limited direct evidence on the impact of analyst coverage on the cost of capital. In this paper, we hypothesize that the amount and nature of analyst coverage can reduce information asymmetry among investors and thus lower the cost of raising equity capital. We investigate the effect of analyst coverage on the underpricing of seasoned equity offerings (SEOs), which is a substantial cost of issuing new shares. Based on 4,766 SEOs in the period 1984-2000, our results suggest that more analyst coverage is associated with lower SEO underpricing. Compared with firms without analyst coverage, firms with the median level of analyst coverage - three analysts - have a 1.19% lower SEO underpricing, a relative decrease of 38%. This effect is robust to controlling for other factors affecting SEO underpricing. We also examine additional attributes of analyst coverage and find that firms followed by analysts working for the lead underwriter, with a reputation for superior ability, or with lower forecast dispersion have incrementally lower SEO underpricing.

Keywords: Analyst coverage, information asymmetry, cost of raising capital, seasoned equity offering

JEL Classification: G29, G12, G32, D82, G24

Suggested Citation

Bowen, Robert M. and Chen, Xia and Cheng, Qiang, Analyst Coverage and the Cost of Raising Equity Capital: Evidence from Underpricing of Seasoned Equity Offerings. Contemporary Accounting Research 25 (3): 657-699, Fall 2008, Available at SSRN: https://ssrn.com/abstract=1022826

Robert M. Bowen

Chapman University - The George L. Argyros School of Business & Economics ( email )

333 N. Glassell
Orange, CA 92866
United States
206.334.0911 (Phone)

HOME PAGE: http://www.chapman.edu/our-faculty/robert-bowen

University of Washington - Foster School of Business ( email )

Box 353226
University of Washington
Seattle, WA 98195-3226
United States
206.334.0911 (Phone)

HOME PAGE: http://foster.uw.edu/faculty-research/directory/robert-bowen/

Xia Chen

Singapore Management University ( email )

60 Stamford Rd.
Singapore 178900
Singapore

Qiang Cheng (Contact Author)

Singapore Management University ( email )

60 Stamford Road
Singapore, 178900
Singapore

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