264 B.E. Eckbo et al.
Ta b l e 6
Total direct issue costs for U.S. issuers of seasoned equity, classified by issuer type and flotation methodFirm commitments Standby rights Uninsured rights
Flotation costs Ind Utl Ind Utl Ind Utl
Number of observations 351 639 42 89 26 23
Underwriter compensation
($ millions)
47 1. 78 1. 20 0. 56
( 1. 03 )( 1. 32 )( 0. 47 )( 0. 34 ) ––Other expenses
($ millions)
0. 16 0. 14 0. 36 0. 38 0. 11 0. 45
( 0. 15 )( 0. 12 )( 0. 19 )( 0. 29 )( 0. 09 )( 0. 19 )Total costs
($ millions)
1. 72 1. 92 1. 59 0. 94 0. 11 0. 45
( 1. 28 )( 1. 45 )( 0. 68 )( 0. 72 )( 0. 09 )( 0. 19 )Total costs/
gross proceeds (%)
6. 09 4. 23 4. 03 2. 44 1. 82 0. 51
( 5. 53 )( 3. 82 )( 3. 32 )( 2. 07 )( 0. 94 )( 0. 22 )Total costs/
market value common (%)
1. 05 0. 49 0. 93 0. 22 0. 80 0. 05
( 0. 68 )( 0. 41 )( 0. 57 )( 0. 18 )( 0. 30 )( 0. 02 )Source:Eckbo and Masulis (1992). The sample size is 1,249 SEOs and the sample period 1963–1981. “Ind”
denotes industrial issues and “Utl” denotes public utility. Data sources in the original study are the SEC Reg-
istered Offerings Statistics data tape and issue prospectuses. The cost of the offer price discount in firm
commitment offers is not included, nor is the value of any “Green Shoe” options. In the standby rights
category, the underwriter’s compensation is computed using the actual takeup fee based on subscription in-
formation.
proceeds is 1.82% for industrial issuer and 0.51% utility issuers. Despite a sub-
scription rate that typically exceeds 70% (Hansen and Pinkerton, 1982; Eckbo and
Masulis, 1992; Singh, 1997), the cost of standbys average as much as 4.03% of
gross proceeds for industrials and 2.44% for utilities. Firm commitment offerings
are the most expensive with average direct costs of 6.09% and 4.23% for industrial
and utility issuers, respectively.Smith (1977), Hansen (1988)andSingh (1997)also
presents costs of standby rights offerings consistent with those inTable 6. Further-
more, the low-cost status of uninsured rights holds internationally as well (e.g.,Bøhren,
Eckbo, and Michalsen, 1997; Slovin, Sushka, and Lai, 2000; Gajewski and Ginglinger,
2002 ).
Eckbo and Masulis (1992)also report that the average underpricing of SEOs in their
firm commitment sample is very close to zero over their sample period (typically, the
issue was offered at the previous closing price). As discussed below, this has since
changed: it is now common to underprice a firm commitment SEO. Since current share-
holders in a rights offer capture the value of underpricing through the value of the
right, the development of underpricing in firm commitment SEOs further exacerbat-
esthe direct-cost disadvantage of this flotation method. It is clear that rights have lowest