Ch. 6: Security Offerings 237
placements, the main focus is on issuances by exchange-listed firms—both seasoned
equity offerings (SEOs) and debt issues.
We have four main objectives: (1) To survey the level of aggregate security issue
activity and some of the characteristics of issuing firms; (2) to review direct issue costs
across security types and selling mechanisms; (3) to survey and interpret the valuation
effect of security issue announcements; and (4) to review and extend evidence on the
performance of issuing firms in the five year post-issue period.
Mapping out the SDC data base, we start by providing an overview of aggregate issue
activity in the U.S. over the period 1980–2003. We separate industrial firms from pub-
lic utilities, and financial issuers from non-financial companies. We track primarily the
largest security classes, such as common stock (IPOs, SEOs, and private placements)
and debt (both straight and convertible), but provide some information on unit offerings,
dual offerings, and foreign offerings (ADR and GDR) as well. We review potential de-
terminants of the wave-like pattern of aggregate security offerings. At the firm level, we
review evidence that links the security offering frequency through time. This includes
the time period between the IPO and the first follow-on SEO, between two successive
SEOs, and between debt and equity issues. Overall, this evidence confirms and gener-
alize the early finding ofMikkelson and Partch (1986)that equity issues for cash are
rare—both on an absolute level and relative to public debt issues.
Our second objective is to survey the nature and magnitude of direct issue costs, in-
cluding the more recent phenomenon of SEO underpricing.^2 At the most basic level
of economic analysis, firms minimize direct costs of raising capital. Yet, surprisingly
few papers try to estimate the direct issue cost function. Following the adverse selec-
tion model ofMyers and Majluf (1984), the literature has been preoccupied with the
potential for wealth transfer caused by security offerings. We confirm the conclusion
ofEckbo and Masulis (1995)that the adverse selection framework is the leading theo-
retical explanation for the announcement-induced abnormal stock returns for seasoned
public offerings of debt and equity. However, the current evidence does not rule out the
influence of direct transaction costs on a firm’s issue decision, but is less supportive of
wealth transfer concerns.
Understanding issue costs and the issue decision requires a thorough understanding
of alternative selling mechanisms. We review how different selling mechanisms are
designed to deal with different forms of information asymmetry, and the associated total
issue costs. The literature here is sparse, leaving the link between contracting theory and
optimal selling mechanisms design a fertile area for future research. One area in which
this has immediate practical importance is in the choice between auctions and firm-
commitment underwriting (fixed price) offerings, as witnessed in the recent Google
IPO. Establishing the efficiency of the auction mechanism is also essential to the literal
interpretation of an offering-price discount (underpricing) as “money left on the table”
for shareholders of the issuing firm (Loughran and Ritter, 2002).
(^2) We touch only briefly on IPO underpricing, which is the topic ofLjungqvist (2007, Chapter 7).