Ch. 6: Security Offerings 273
earlier studies is due to a truncation regression bias and that once the withdrawal prob-
ability is taken into account this information spillover effect becomes symmetric.
Turning to SEO underpricing,Eckbo and Masulis (1992)examine mean and median
underpricing by flotation methods for utility and industrial issues of NYSE and AMEX
listed firms over the 1963–1981 period. They find that offer prices for firm commit-
ments of industrial and utility issuers were on average underpriced by less than a half
percent (i.e., 0.44 percent).Altinkilic and Hansen (2003)andCorwin (2003)investigate
SEO underpricing of NYSE and Nasdaq listed stocks in more recent periods. Looking
at mean underpricing by year, they find that it increases substantially in the 1990s rela-
tive to the 1980s. For example,Corwin (2003)reports that in the 1980s, it averaged 1.30
percent, while in the 1990s it averaged 2.92 percent. He observes that the rise in average
underpricing of SEOs could be due in part to the large increase in the proportion of Nas-
daq issuers, which in the 1990s were very young and with their asset values comprised
mainly of risky intellectual property and growth options. However, a full explanation
for SEO underpricing as well as its recent rise is still lacking.
Safieddine and Wilhelm (1996)analyzes the relationship of SEO underpricing to
short selling. They examine offer date returns for industrials and utilities issuers with
and without option trading and relate it to short interests in their stocks. They exam-
ine this activity before and after the enactment of Rule 10b-21, which prohibited using
shares purchased at the offering price to close out short positions opened after the of-
fering registration statement is filled. In this study, offering day returns are measured
relative to the high and low prices on the day prior to the offer and the offer day. They re-
port that underpricing is significantly negatively related to underwriter rank and a utility
indicator and significantly positively related to abnormal short interest pre-Rule 10b-21
and an option trading indicator in the Rule 10b-21 period. They conclude that SEO offer
dates exhibit abnormally high levels of short interest and option open interests and that
SEO price discounts are positively related to these higher levels of short interest and
option open interest. They also conclude that Rule 10b-21 appears to have curbed short
selling activities and reduced underpricing, though Rule 10b-21 was implemented only
three years earlier.
Kim and Shin (2004)re-examines the effects of short selling on underpricing using
a longer and more recent sample period. They find that offer discounts are negatively
related to underwriter rank and positively related to the Rule 10b-21 indicator, under-
writer spread, and return volatility. Kim and Shin conclude that the SEC Rule was a
partial cause for the temporal increased underpricing of NYSE listed stocks between
the 1980s and 1990s, which runs counter to the conclusions ofSafieddine and Wilhelm
(1996). One serious concern with their study is that both underwriter rank and under-
writer spreads are endogenously determined. Whether or not these results will hold up
to taking this endogeneity in account is an open question.
Corwin (2003)reexamine the effect of Rule 10b-21 on underpricing using a model
that excludes both underwriter rank and spread as regressors and draws a similar conclu-
sion toKim and Shin (2004). In his study, SEO underpricing is investigated for NYSE
and Nasdaq listed stocks, with special emphasis on the differing market microstruc-