Discounting and Underpricing in Seasoned Equity Offerings

Journal of Financial Economics (JFE), 2003, 69, 285-323

Posted: 19 Sep 2002 Last revised: 5 Sep 2013

See all articles by Oya Altinkilic

Oya Altinkilic

University of Maryland - Robert H. Smith School of Business

Robert S. Hansen

Tulane University - A.B. Freeman School of Business

Abstract

Discounting and underpricing spread across most seasoned equity offers in the 1990s and were four to five times higher than in earlier years - particularly for riskier and more difficult to market offers, which were more prevalent. Analyses suggest that expected discounting is a cost of uncertainty about firm value, marketing new shares, and acquiring information that raises the offer price. Stockholders appear to recognize this as they incorporate predictable discounting in stock prices when equity offers are first announced. The surprise component of discounting, which reflects the lead bank's final adjustment to the offer price after the close of trading the night before the offer, releases information that often causes economically large swings in firm value on the offer day. The evidence points to disparities between the issuer's closing price and the price suggested in the lead bank's final order book as a primary source of information. The discount surprise appears to be an effective mechanism used by lead banks to update capital suppliers with that eleventh hour information before they commit their funds.

Keywords: Underwriters, Seasoned public offerings, Investment banking, Underpricing

JEL Classification: G32, G34

Suggested Citation

Altinkilic, Oya and Hansen, Robert S., Discounting and Underpricing in Seasoned Equity Offerings. Journal of Financial Economics (JFE), 2003, 69, 285-323, Available at SSRN: https://ssrn.com/abstract=329500

Oya Altinkilic

University of Maryland - Robert H. Smith School of Business ( email )

4426 Van Munching Hall
Department of Finance
College Park, MD 20742
United States

Robert S. Hansen (Contact Author)

Tulane University - A.B. Freeman School of Business ( email )

Goldring/Woldenberg Hall
7 McAllister Blvd.
New Orleans, LA 70118
United States
504-865-5624 (Phone)

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