268 B.E. Eckbo et al.
Smith (1977)’s findings that rights and standby offerings are less costly. Estimating
determinants of direct flotation costs separately for industrial and utility issuers, they
find for industrial issuers that flotation costs are negatively related to gross proceeds
and average shareholding value and positively related to gross proceeds squared, return
standard deviation, and percent change in shares. They emphasize the importance to
flotation method choice of expected shareholder take-up in both rights and standby of-
fers. Their evidence is consistent with theMyers and Majluf (1984)interpretation of the
market’s negative average announcement price reaction to an SEO as an upward revi-
sion in the market’s expectation that the security is overvalued. They also find evidence
that firms choose the flotation method that maximizes the net proceeds of their security
offerings.
Altinkilic and Hansen (2000)study the determinants of underwriter spreads in indus-
trial SEOs. They calculate mean underwriter spreads across offer size ranges and find
that average spreads vary from 4.4 percent to 6.3 percent. They estimate the determi-
nants of underwriter spreads as a function of the log of offer size, percent change in
shares, return standard deviation and value of all underwritten industrial SEOs in the
prior 3 months. They find that spread is significantly negatively related to log of offer
size and positively related to percent change in shares, return standard deviation, the
value of underwritten industrial SEOs in prior 3 months and the inverse of offer size
when it is substituted for the log of offer size. Alternatively, Altinkilic and Hansen re-
place the log of offer size by the inverse of offer size and use it to estimate the slope
of marginal spread. They find that the slope rises with offer size. This supports a rising
variable cost of underwriting as offer size expands. Their perspective is that underwriter
spreads are U shaped and that larger, less risky issuers have spreads that reach their min-
imum value at high offer sizes.Hansen (2001)examines whether this U shape spread
phenomenon is present in IPO spreads prior to the rise of the 7% contract. He shows
that IPO spreads are also consistent with rising variable costs, and are U-shaped. Cor-
roborating evidence from German IPOs and SEOs is reported byBuhner and Kaserer
(2002)andKaserer and Kraft (2003)that marginal spreads are not decreasing in offer
size. The Kaserer and Kraft analysis uses an principal components analysis within a
generalized weighted least squares framework.
Kim, Palia, and Saunders (2005a)jointly study underwriter spreads and underpricing
in SEOs as well as IPOs. They find that underwriter spreads are positively correlated
with underpricing costs in SEOs and IPOs. They also investigate whether underwriter
spreads are affected by market conditions, underwriter competition and issue charac-
teristics using three stage least squares. They find SEO underwriter spread is positively
related to underpricing, issuer leverage, missing financial statements, the inverse of the
log of offer size and negatively related to market share of the top 25 underwriters, a
top 25 underwriter indicator, indicator for bank entry into the underwriting market, and
issuer profitability.
Butler, Grullon, and Weston (2005b)study the importance of SEO liquidity as a de-
terminant of SEO underwriting spreads over the 1993–2000 period. They examine a
broad range of liquidity measures including: quoted spread, effective spread, relative