396 Part Four Financing Decisions and Market Efficiency
bre44380_ch15_379-409.indd 396 09/11/15 07:56 AM
Type CompanyIssue Amount
($ millions)Underwriting
Spread (%)
Common Stock:
IPO Alibaba Group $21,767* 1.2%
IPO Twitter 1,820 3.25
IPO Virgin America 307 6.25
IPO Bellicum Pharmaceuticals 140 7.0
IPO Histogenics Corp. 65 7.0
IPO Spark Energy 54 7.0
Seasoned Hilton Worldwide 2,250 0.50
Seasoned Plains GP Holdings 1,500 0.5625
Seasoned Textura Corp. 174 1.71
Seasoned Shutterstock 276 4.5
Seasoned Rally Software 121 4.9Debt:
3.375% notes, 2024 Google $1,000 0.450%
4.7% notes, 2044 Arizona Public Service Co. 250 0.875
4% senior notes, 2024 The Kroger Co. 500 0.650
2.75% convertible senior notes, 2034 Fluidigm 175 3.0❱ TABLE 15.3
Gross underwriting
spreads of selected
issues. Spreads are
percentages of gross
proceeds.
*Excludes the exercise by the
underwriters of an option to
sell an additional 48 million
Alibaba shares.Figure 15.5 summarizes a study of total issue costs (spreads plus administrative costs) for
several thousand issues between 2004 and 2008.Market Reaction to Stock Issues
Economists who have studied seasoned issues of common stock have generally found that
announcement of the issue results in a decline in the stock price. For industrial issues in the
United States this decline amounts to 3 to 4%.^37 While this may not sound overwhelming, the fall
in market value is equivalent, on average, to nearly a third of the new money raised by the issue.
What’s going on here? One view is that the price of the stock is simply depressed by the
prospect of the additional supply. On the other hand, there is little sign that the extent of the
price fall increases with the size of the stock issue. There is an alternative explanation that
seems to fit the facts better.
Suppose that the CFO of a restaurant chain is strongly optimistic about its prospects. From
her point of view, the company’s stock price is too low. Yet the company wants to issue shares
to finance expansion into the new state of Northern California.^38 What is she to do? All the
choices have drawbacks. If the chain sells common stock, it will favor new investors at the
expense of old shareholders. When investors come to share the CFO’s optimism, the share
price will rise, and the bargain price to the new investors will be evident.
If the CFO could convince investors to accept her rosy view of the future, then new shares
could be sold at a fair price. But this is not so easy. CEOs and CFOs always take care to sound
upbeat, so just announcing “I’m optimistic” has little effect. But supplying detailed information
about business plans and profit forecasts is costly and is also of great assistance to competitors.(^37) Jung, K., Y. Kim, and R. Stulz, “Timing, Investment Opportunities, Managerial Discretion, and the Security Issue Decision,” Jour-
nal of Financial Economics 42 (October 1996), pp. 159–185.
(^38) Northern California seceded from California and became the fifty-second state in 2024.