260 B.E. Eckbo et al.
Panel A ofTable 5reports the average number of years between the IPO offer date
and the first post-IPO security offering. In the sample of 6,092 IPOs, there are 1,724
firms that follow the IPO with a SEO as the first post-IPO security offering. The average
number of years between the IPO and the SEO is 2.31 years. Panel A also shows that
the SEO is the most common type of security offering to be made after the IPO. The
second most common “first post-IPO offering” is a private placement of debt: 353 firms
follow the IPO with this type of security.
The time from the IPO to the first security offering varies little across security types.
The average time between the IPO and the follow-on security offering ranges from
1.95 years for convertible debt to 2.81 years for private placement of equity. Excluding
convertible debt, the remaining five securities are offered on average between 2.27 and
2.81 years after the IPO. As suggested byEckbo and Norli (2006), it appears that it takes
on average 2.35 years to burn through the IPO proceeds, after which time companies
may be selecting the security offering that minimizes issue costs.
Panel B ofTable 5reports the average number of years between the IPO and the first
offering of security typej—regardless of whether or not security offeringjis the first
to follow the IPO. Again, conditional on observing an IPO during the sample period,
the most frequent security offering in our sample is SEOs. However, it is clear that if
one does not condition on observing an IPO, the most common security offered is debt.
As expected, the average number of years from the IPO to a specific security offering
is longer than in Panel A ofTable 5. The reason is that in Panel A each offering is
required to be the first offering after the IPO. Panel B shows that following an equity
IPO a convertible debt offering typically occurs sooner than a straight debt offering.
The finding that only one in two firms undertake a follow-on offerings is interesting.
Although private firms almost certainly go public partly to get access to public security
markets, external security issues (for cash) may be costly relative to internal financing.
As discussed inMyers and Majluf (1984)and in Section4 below, information asymme-
tries between the issuer and investors purchasing the issue may give rise to issue costs.
These issue costs are found to be roughly proportional to the ex ante risk that an issue is
overpriced, which leadsMyers and Majluf (1984)to propose a financing pecking order.
Internal equity (retained earnings) tops the pecking order, followed by debt securities
and, finally, by external equity issues.
As surveyed byFrank and Goyal (2007), one prediction of the pecking order model
is that debt ratios should be driven by the need for external funds. For example, the
debt ratio should increase when firms experience a “financing deficit” (when retained
earnings are insufficient to cover investment outlays).Shyam-Sunder and Myers (1999)
find evidence consistent with this prediction. However,Frank and Goyal (2003)and
Fama and French (2005)reach a different conclusion. Using a different sample than
Shyam-Sunder and Myers (1999), Frank and Goyal (2003)find instead that net equity
issues track financing deficits more closely than do net debt issues.Fama and French
(2005)construct a measure of equity issues that includes any transaction that increases
the split-adjusted number of shares outstanding. In addition to public equity offers for
cash, such transactions include stock issues to employees, stock financed mergers, and