238 B.E. Eckbo et al.
A third major objective of the survey is to both review and provide additional evi-
dence on short- and long-term performance of issuing firms. In the period after the re-
view ofEckbo and Masulis (1995), studies reporting short-term, announcement-period
abnormal stock returns have focused in particular on the effect of the flotation method
choice and of foreign offerings. Interestingly, the well-known negative announcement
effect of the average SEO in the U.S. appears to be somewhat of a U.S.-specific phe-
nomenon. WhileEckbo and Masulis (1995)did not cover long-run performance studies,
in this survey we provide our own large-scale analysis in addition to surveying the evi-
dence in existing studies.
As inLoughran and Ritter (1995)andEckbo and Norli (2004), we find thattotalre-
turns are relatively low following security offerings, and in particular following IPOs.
The low post-issue total return is most noticeable after IPO clusters (“hot” IPO peri-
ods). These clusters raise issues concerning selection bias and whatShultz (2003)terms
“pseudo-timing” evidence. Overall, consistent with the conclusions ofEckbo, Masulis,
and Norli (2000), Brav, Geczy, and Gompers (2000)andEckbo and Norli (2005),but
contrary to the inferenceRitter (2003)draws from his survey, we conclude that the pre-
ponderance of the evidence fails to reject the hypothesis of zeroabnormalreturns in
the post-issue period. This conclusion is robust to alternative definitions of expected re-
turns, and it holds whether the issue is an IPO, a SEO, a private placement, or a (straight
or convertible) debt offering.
The survey is organized as follows. Section2 provides an overview of major regu-
latory rules and restrictions guiding security issues in the U.S. The section covers both
regulations by the Securities and Exchange Commission (SEC), and self-regulatory au-
thority rules issued by stock exchanges and the National Association of Security Dealers
(NASD). Section2 also summarizes the overall issue activity in the SDC population of
U.S. issuers, 1980–2004. Section3 reviews direct issue costs across major flotation
methods, with a major emphasis on underwriting costs and understanding the under-
writing process. Section4 examines the flotation method choice and summarizes the
evidence on the valuation effects of security offering announcements (both U.S. and
internationally). Section5 examines various theories for post-issue stock price perfor-
mance, and presents the results of an original long-term return analysis performed on
our SDC sample. Section6 provide concluding remarks.
- The security offering process
Equity offerings come in many colors and flavors, from IPOs to SEOs, public offers
to private placements, classes of stock with differing cash flow and voting rights, from
domestic issues to global issues and from warrants to employee/management stock op-
tions to convertible debt. They are also sold using many different mechanisms, from
a firm commitment underwriting contract to a rights offering to a discriminatory or
non-discriminatory auction, to more exotic methods such as privatizations, carve-outs,