236 B.E. Eckbo et al.
- Introduction
Security offerings are a very visible and important activity in the life of a firm. Their
visibility arises in part because of the typically large amount of new capital raised rela-
tive to an issuer’s existing capital base or asset size. The motives for security offerings
are quite varied. The most common reason given for these actions is to raise capital for
capital expenditures and new investment projects. Other reasons explored in the litera-
ture include the need to refinance or replace existing or maturing securities, to modify a
firms capital structure, to exploit private information about securities intrinsic value, to
exploit periods when financing costs are historically low, to finance mergers and acqui-
sitions, to facilitate asset restructuring such as spin-offs and carve-outs, to shift wealth
and risk bearing among classes of securities, to improve the liquidity of existing securi-
ties, to create more diffuse voting rights and ownership, to strengthen takeover defenses
and to facilitate blockholder sales, privatizations, demutualizations and reorganizations.
This survey focuses exclusively on security offeringsfor cash, and then primarily
to thepublic—although we also track private placements to some extent. Non-cash of-
ferings, such as securities issued as employee compensation, and the many variants of
security swaps, are covered elsewhere in this Handbook. For example, stocks issued
as part of employee compensation plans are covered extensively inAggarwal (2007,
Chapter 17). Equity-for-equity swaps associated with mergers and takeovers are evi-
denced inBetton, Eckbo, and Thorburn (2007, Chapter 15). Security swaps associated
with financial restructurings of non-distressed firms are covered inEckbo and Thorburn
(2007, Chapter 16), and senior-for-junior security swaps by firms in financial distress
are examined inHotchkiss et al. (2007, Chapter 14).
The decision to issue securities draws on all of the core areas in financial economics:
asset pricing theory, capital structure theory, managerial investment incentives, finan-
cial institutions, contracting, and corporate governance. Moreover, there is a wealth
of available data, particularly with the emergence in the 1990s of the comprehensive,
machine-readable, transactions-oriented data base provided by the Security Data Cor-
poration (SDC), with data back to 1980. Yet, there is surprisingly little consensus on
key determinants of the security issuance decision and its economic effects on the firm.
The very existence of elaborate schemes for marketing security offerings to the
public—including book building and road shows by underwriters—speaks to the im-
portance of information asymmetries in the market for public issues. Moreover, judging
from the recent regulatory focus on investor protection (e.g., the Sarbanes–Oxley Act of
2002), public security offerings for cash are relatively vulnerable to potential conflicts
of interests. As such, these security issues are also the prime empirical laboratory for
exploring models of capital structure choice—including the “pecking order” of (Myers,
1984 )—as well as selling-mechanism designs that presume the public is substantially
less informed than the issuer about the true value of the security issued.^1 While the sur-
vey provides information on the number of initial public offerings (IPOs) and private
(^1) Time series evidence on the pecking order theory is surveyed inFrank and Goyal (2007, Chapter 12).