Ch. 6: Security Offerings 235
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 primar-
ily 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
- Following the IPO, only about one-half of the publicly traded firms undertake
a public security offering ofanytype, 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 in-
terpret 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 eq-
uity issues may be linked to issuers’ investment activity, a promising direction for future
research.
Keywords
security offering, IPO, SEO, debt offer, flotation method, underwriting, rights offer,
private placement, shelf registration, adverse selection, announcement returns, long run
performance