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Seasoned Equity Offerings: Quality of Accounting Information and Expected Flotation Costs

55 Pages Posted: 17 Jul 2006 Last revised: 18 Mar 2009

Gemma Lee

Kyung Hee University

Ronald W. Masulis

University of New South Wales - Australian School of Business; European Corporate Governance Institute (ECGI); Financial Research Network (FIRN); National University of Singapore (NUS) - Asian Bureau of Finance and Economic Research (ABFER)

Date Written: August 27, 2008

Abstract

Flotation costs represent a significant loss of capital to firms and are positively related to information asymmetry between managers and outside investors. We measure a firm's information asymmetry by its accounting information quality based on two extensions of the Dechow and Dichev earnings accruals model (2002), which is a more direct approach to assessing the information available to outside investors than the more commonly used proxies. Our main hypothesis is that poor accounting information quality raises uncertainty about a firm's financial condition for outside investors, though not necessarily for insiders. This accounting effect lowers demand for a firm's new equity, thereby raising underwriting costs and risk. Using a large sample of seasoned equity offerings, we show that poor accounting information quality is associated with higher flotation costs in terms of (1) larger underwriting fees, (2) larger negative SEO announcement effects, and (3) a higher probability of SEO withdrawals. These results are robust to joint determination of offer size and flotation cost components and to adjustments for sample selection bias.

Keywords: Seasoned equity offering, SEO, stock offer, stock issue, asymmetric information, accounting information, accruals quality, Dechow and Dichev model, offer size, flotation costs, announcement effect, underwriting fees, gross spread, withdrawn offers, cancelled SEOs

JEL Classification: D82, G12, G14, G24, G32, M41, M43

Suggested Citation

Lee, Gemma and Masulis, Ronald W., Seasoned Equity Offerings: Quality of Accounting Information and Expected Flotation Costs (August 27, 2008). Journal of Financial Economics (JFE), Forthcoming. Available at SSRN: https://ssrn.com/abstract=917044

Gemma Lee

Kyung Hee University ( email )

1732 Deogyung-daero
Yongin-si, Gyeonggi-Do 446-701
Korea, Republic of (South Korea)
82-31-201-2314 (Phone)
82-31-201-2281 (Fax)

Ronald W. Masulis (Contact Author)

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

National University of Singapore (NUS) - Asian Bureau of Finance and Economic Research (ABFER) ( email )

BIZ 2 Storey 4, 04-05
1 Business Link
Singapore, 117592
Singapore

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